FAI General Insurance Co Ltd v McSweeney
[1998] FCA 1789
•24-April-1998
FAI General Insurance Co Limited v Brian Albert McSweeney, Bruce William Phillips, John William Beale, Paul Frederick Turner, Timothy Patrick Cullen, Michael John Gaertner, Tag Pacific Limited and Toikan Holdings Pty Limited
Tag Pacific Limited and Toikan Holdings Pty Limited (first Cross-Claimants) v FAI General Insurance Co Limited (first Cross-Respondent)
Brian Albert McSweeney and Bruce William Phillips (second Cross-Claimants) v FAI General Insurance Co Limited (second Cross-Respondent)
Travel Compensation Fund v FAI General Insurance Co Limited
FAI General Insurance Co Limited (first Cross-Claimant) v Brian Albert McSweeney, Paul Frederick Turner, Bruce William Phillips and Timothy Patrick Cullen (first Cross-Respondents)
Brian Albert McSweeney, Paul Frederick Turner, Bruce William Phillips and Timothy Patrick Cullen (second Cross-Claimants) v FAI General Insurance Co Limited (second Cross-Respondent)
FED No. 1789/98
Insurance
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
JUDGE: LINDGREN J
Nos. NG 312 of 1992 and NG 948 of 1992
Number of pages - 85
Insurance - misrepresentation - non-disclosure - meaning of expression "circumstances which may give rise to a claim" in claims made and notified policy - whether facts which later give rise to a claim constitute "circumstances which may give rise to a claim" at time of completion of proposal form - whether statements made in documents attached to earlier proposal form constituted misrepresentations - whether representations in fact made - whether contract of insurance may be avoided by reason of misrepresentations made temporally before but not in connection with the proposal for insurance contract sought to be avoided.
Words and Phrases - "before"
Insurance Contracts Act 1984 (Cth), ss 21, 26, 28
Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606, applied
Bayer Leverkusen Ltd v Phoenix Assurance Company (unreported, NSWCA, Moffitt, Hardie and Hope JJA, 19 March 1973), referred to
Bowling v Weinert [1978] 2 NSWLR 282, applied
EST Limited v HIH Casualty and General Insurance Ltd (unreported, SCVic, No 6938 of 1994, Mandie J, 27 October 1997), referred to
FAI General Insurance Co Ltd v Hendry Rae & Court (1993) 10 WAR 322, considered
Gamer's Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236, applied
Holts Corrosion Control Pty Ltd v CML Fire & General Insurance Co Ltd (1984) 3 ANZ Cas 60-559, considered
Pengelly v British Empire Assurance Co (1974) 38 DLR (3d) 624, considered
Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 840, applied
DATE OF HEARING: 5-9, 13-16, 19-23, 26-30 June; 3-7, 10-14 July; 23, 25
August 1995; 11 March 1996.
DATE OF DECISION: 24 April 1998
PLACE: SYDNEY
#DATE 27:04:1998
Appearances
NG 312 of 1992
Counsel for the Applicant: Mr J C Campbell QC with Mr P Liney (FAI)
Solicitors for the Applicant: Colin Biggers and Paisley (FAI)
Counsel for the Respondents: Mr P M Biscoe QC with Mr S Climpson appeared for
The first, second, fourth and fifth respondents
(McSweeney, Phillips, Turner and Cullen)
Mr K Manion appeared (submitting) for the sixth
respondent (Gaertner)
Solicitors for the Respondents: Gillis Delaney appeared for the first, second, fourth
and fifth respondents (McSweeney, Phillips, Turner
and Cullen)
Mr D M Vaughan, solicitor, of Heaney, Richardson &
Nemes appeared (submitting) for the third respondent
(Beale)
Walters Solicitors, appeared (submitting) for the sixth
respondent (Gaertner)
NG 948 of 1992
Counsel for the Applicant: Mr P Roberts with Mr M K Minehan (TCF)
Solicitor for the Applicant: T G Hartmann & Associates (TCF)
Counsel for the Respondent: Mr J C Campbell QC with Mr P Liney (FAI)
Solicitors for the Respondents: Colin Biggers & Paisley (FAI).
THE COURT ORDERS THAT:
Both proceedings (NG 312 of 1992 and NG 948 of 1992) be stood over to 8 May 1998 at 9.30 am for the making of orders.
2. The parties supply to the Associate to Lindgren J by 6 May 1998 agreed short minutes of the orders (including orders as to costs) to be made, and if agreement has not been reached by then, short minutes of the orders (including orders as to costs) for which they will respectively contend, and written submissions in support.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
TABLE OF CONTENTS REASONS FOR JUDGMENT (PART IV)
INTRODUCTION ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
2
ISSUES ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 3 General issues relating to misrepresentation ........ ........ ........ ........ ........ ........ .... 3 General issues relating to non-disclosure........ ........ ........ ........ ........ ........ ........ ... 6 The alleged 7 May 1990 representations ........ ........ ........ ........ ........ ........ ........ ... 7 Effect under section 28 of the IC Act on misrepresentation and failure to comply with duty of disclosure ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 8
MISREPRESENTATION GENERALLY ........ ........ ........ ........ ........ ........ ........ ... 10 RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TAG FACTS ........ ........ ........ ........ ........ ........ .. 16
Issue (1) Was any partner of PMS, after enquiry, aware, on 22 May 1989, of the circumstances referred to in pars 1-26 of Part A of the Schedule (to FAI's third further amended statement of claim)? ........ ........ ........ ........ ........ .. 16
Issue (2) Did those circumstances described in Part A of the Schedule (to FAI's third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of "circumstance[s] which may give rise to a claim" in question 13 (b) (ii)? ........ ........ ........ ........ ... 20
Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? ........ ........ .... 27
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAI's decision whether to accept the risk, and, if so, on what terms? ........ ..... 27
RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH STATUTORY DUTY OF DISCLOSURE - THE TAG FACTS ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 28
Issue (5) Were the matters described in pars 1-26 of Part A of the Schedule (to FAI's third further amended statement of claim) known to PMS as at 22 May 1989? ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 28
Issue (6) As to all or any of those matters in Part A of the Schedule which PMS knew, were they (i) matters which PMS knew to be relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? ........ ........ ........ ......
28
RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TCF FACTS ........ ........ ........ ........ ........ ........ .. 29
Issue (1) Was any partner of PMS, after enquiry, aware, on 22 May 1989, of the circumstances referred to in pars 1-22 of Part B of the Schedule (to FAI's third further amended statement of claim)? ........ ........ ........ ........ ........ .. 29
The 1987 audit (Part B (pars 1-7) of the Schedule) ........ ........ ........ ...... 29 The 1988 applications for extension of time (Part B, pars 8-21) and par 22 of Part B ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 38
Issue (2) Did those circumstances described in Part B of the Schedule (to FAI's third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of "circumstance[s] which may give rise to a claim" in question 13 (b) (ii)? ........ ........ ........ ........ ... 41
Events subsequent to the underlying facts alleged to be suggestive of the making of a claim ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 42
The inherent nature of the underlying facts as an indication of the likelihood of a claim: the 1987 audit ........ ........ ........ ........ ........ ........ ...... 45
The inherent nature of the underlying facts as an indication of the likelihood of a claim: the 1988 applications for extension of time ....... 47
Paragraph 22 of Part B of the Schedule (to FAI's third further amended statement of claim) ........ ........ ........ ........ ........ ........ ........ ........ . 47
Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? ........ ........ .... 48
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAI's decision whether to accept the risk, and, if so, on what terms? ........ ..... 48
RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS ... 48
Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule (to FAI's third further amended statement of claim) known to PMS as at 22 May 1989? ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 48
Issue (6) As to all or any of those matters in Part B of the Schedule which PMS knew, were they (i) matters which PMS knew to be relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? ........ ........ ........ ......
49
Conclusion on 1989 proposal ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 50 ALLEGED MISREPRESENTATION AND NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE, AND RENEWAL OF THE CHATSWOOD AND GOSFORD POLICIES FOR 1991-1992 GENERALLY ........ ........ ........ ........ .... 50
THE ALLEGED 7 MAY 1990 REPRESENTATIONS AND RENEWAL OF THE PMS POLICY FOR 1990-1991 ........ ........ ........ ........ ........ ........ ........ ........ . 52
General ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 52 Issue (7) Did McS make the 7 May 1990 representations as pleaded? ........ . 59 Issue (8) If "yes" to Issue (7) were the 7 May 1990 representations untrue? 64 RENEWAL OF THE PMS CHATSWOOD POLICY FOR 1991-1992 - ALLEGED MISREPRESENTATION - THE TCF FACTS ........ ........ ........ ....... 66
Issue (1) Was any partner of PMS Chatswood, after enquiry, aware, on 28 April 1991, of the circumstances set out in pars 1-22 of Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding? ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 66
Events subsequent to the underlying TCF facts which are alleged to be suggestive of the making of a claim ........ ........ ........ ........ ........ ........ .. 66
Awareness of McS and of Cullen that TCF was represented at the section 541 examinations ........ ........ ........ ........ ........ ........ ........ ........ ........ 67
Awareness of TCF's entitlement to sue ........ ........ ........ ........ ........ ........ . 70 FAI's allegation that legal representation reflected a consciousness of possible liability ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 71
Conclusion ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. 72 Issue (2) Did those circumstances described in Part B of the Schedule (to FAI's further amended defence) of which any partner of PMS Chatswood (effectively McS) was aware, on 28 April 1991, satisfy the description of "circumstance[s] which may give rise to a claim" in question 13 (b) (ii)? ....... 72
The section 541 examinations, more generally ........ ........ ........ ........ ...... 73 CAC interviews ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 75 The fact of the public examinations, at which statutory bodies were represented ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... 75
Line of questioning of McS and Cullen in the examinations ........ ........ 76 The 1987 audit ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . 76 The 1988 conduct ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 77 Breadth of, and possible inferences from, the questioning ........ ........ 78 Assurances from Mr Ross ........ ........ ........ ........ ........ ........ ........ ........ ...... 81 Absence of practice of TCF suing accountants ........ ........ ........ ........ ..... 83 Events subsequent to the section 541 examinations ........ ........ ........ ...... 84 Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have TCF and PMS Chatswood nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... 84
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAI's decision whether to accept the risk, and, if so, on what terms? ........ ..... 85
RENEWAL OF THE CHATSWOOD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS .......... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... 86
Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding known to PMS Chatswood as at 28 April 1991? ........ ........ ........ ........ ........ ........ ........ ... 86
Issue (6) As to all or any of those matters in Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding which PMS Chatswood knew, were they (i) matters which PMS Chatswood knew to be matters relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? ........ ........ ........ ......
86
Conclusion on 1991 Chatswood proposal ........ ........ ........ ........ ........ ........ ........ . 87 RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED MISREPRESENTATION - THE TCF FACTS ......... ........ ........ ........ ........ ........ . 87
Issue (1) Was any of the partners of PMS Gosford, after enquiry, aware, on 22 April 1991, of the circumstances set out in pars 1-22 of Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding, or of the fact that there might be a claim against Phillips by reason of PMS's conduct in 1987 and 1988 in relation to Travel and TCF? ... 88
Issue (2) Did those circumstances described in Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding of which any partner of PMS Gosford (effectively Cullen) was aware, on 22 April 1991, satisfy the description of "circumstance[s] which may give rise to a claim" in question 13 (b) (ii)? ........ ........ ........ ........ ........ ........ ........ ........ ........ .... 89
Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have TCF and PMS Gosford nonetheless established that Cullen, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held? ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... 90
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that Cullen, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAI's decision whether to accept the risk, and, if so, on what terms? ........ ..... 91
RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ 91
Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding known to PMS Gosford as at 22 April 1991? ........ ........ ........ ........ ........ ........ ........ ........ 91
Issue (6) As to all or any of those matters in Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding which PMS Gosford knew, were they (i) matters which PMS Gosford knew to be matters relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant? ........ ........ ........ ......
92
Conclusion on 1991 Gosford proposal ........ ........ ........ ........ ........ ........ ........ ...... 93 ALLEGED BREACH OF IMPLIED PROVISION REQUIRING INSURED TO ACT TOWARDS FAI WITH UTMOST GOOD FAITH ........ ........ ........ ...... 93
ATTACK ON McS'S CREDIT ......... ........ ........ ........ ........ ........ ........ ........ ........ ... 93 SUMMARY OF CONCLUSIONS ........ ........ ........ ........ ........ ........ ........ ........ ...... 94
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IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY
BETWEEN: Applicant
AND: First Respondent
Second Respondent
Third Respondent
Fourth Respondent
Fifth Respondent
Sixth Respondent
Seventh Respondent
Eighth Respondent
BETWEEN: AND: BETWEEN: AND: T
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY
BETWEEN: Applicant
AND: RESPONDENT
BETWEEN: AND:
BETWEEN: AND: JUDGE: DATE: 24 APRIL 1998 PLACE: SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 312 of 1992
BETWEEN: FAI GENERAL INSURANCE CO LIMITED Applicant
AND: BRIAN ALBERT McSWEENEY First Respondent
BRUCE WILLIAM PHILLIPS
Second Respondent
JOHN WILLIAM BEALE
Third Respondent
PAUL FREDERICK TURNER
Fourth Respondent
TIMOTHY PATRICK CULLEN
Fifth Respondent
MICHAEL JOHN GAERTNER
Sixth Respondent
TAG PACIFIC LIMITED
Seventh Respondent
TOIKAN HOLDINGS PTY LIMITED
Eighth Respondent
BETWEEN: TAG PACIFIC LIMITED AND TOIKAN HOLDINGS PTY LIMITED FIRST CROSS-CLAIMANTS
AND: FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-RESPONDENT
BETWEEN: BRIAN ALBERT McSWEENEY AND BRUCE WILLIAM PHILLIPS SECOND CROSS-CLAIMANTS
AND: FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 948 of 1992
BETWEEN: TRAVEL COMPENSATION FUND Applicant
AND: FAI GENERAL INSURANCE CO LIMITED RESPONDENT
BETWEEN: FAI GENERAL INSURANCE CO LIMITED FIRST CROSS-CLAIMANT
AND: BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN FIRST CROSS-RESPONDENTS
BETWEEN: BRIAN ALBERT McSWEENEY, PAUL FREDERICK TURNER, BRUCE WILLIAM PHILLIPS AND TIMOTHY PATRICK CULLEN SECOND CROSS-CLAIMANTS
AND: FAI GENERAL INSURANCE CO LIMITED SECOND CROSS-RESPONDENT
JUDGE: LINDGREN J DATE: 24 APRIL 1998 PLACE: SYDNEY
REASONS FOR JUDGMENT - PART IV ALLEGED MISREPRESENTATION AND FAILURE TO COMPLY
WITH DUTY OF DISCLOSURE, RELATING TO RENEWAL OF POLICIES
INTRODUCTION
Parts I, II and III of my Reasons for Judgment in these two proceedings have been delivered. I take them as read. In particular, I take as read Part I's account of the pleadings and outline of the facts relating to insurance, including events between the TAG judgment and the TCF judgment on the one hand, and the commencement of the present hearing on the other. I continue to use the abbreviations previously identified. Annexed to the present Part is a chronology of insurance events. This forms part of my Reasons.
(In Part III of these Reasons, I explained that I would use the expression "TCF and PMS submit." Although TCF has no direct interest in the issue of avoidance of the PMS insurance contract, it has an interest in the issue of McS's awareness of the matters described in the twenty-two paragraphs of Part B of the Schedule (to FAI's third further amended statement of claim in the TAG insurance proceeding), because, apart from certain differences in par 22 noted later, they are identical in all relevant respects to those described in the twenty-two paragraphs of Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding. In relation to the Chatswood policy and the Gosford policy, it is strictly not correct even to say "PMS submit" as distinct from "PMS Chatswood submit" and "PMS Gosford submit". I propose to use the expression "PMS submit" in relation to the PMS policy and the expression "TCF and PMS submit" in relation to the Chatswood policy and the Gosford policy.)
ISSUES
FAI alleges misrepresentation and failure to comply with the duty of disclosure imposed by s 21 of the IC Act, relating to the renewals of the PMS policy for 1989-1990 and the Chatswood and Gosford policies for 1991-1992. Certain issues are common to all three renewals. Some are also relevant to certain alleged misrepresentations which FAI says McS made in PMS's proposal dated 7 May 1990 for renewal of the PMS policy for 1990-1991. FAI submits that these are relevant to the renewal of the Chatswood policy for 1991-1992.
General issues relating to misrepresentation
Except for the 7 May 1990 representations referred to above and below, in each case the alleged misrepresentations arise from the negative answer given to question 13 (b) (ii) in, and the declaration of truth at the end of, a proposal form submitted to FAI (both set out in Part I).
The proposal form dated 22 May 1989 signed by McS and submitted for renewal of the PMS policy disclosed, in answer to question 13 (a) a threatened claim by C E McDonald (Aust) Pty Ltd ("McDonald"), and disclosed nothing further in the answers to question 13 (a) or 13 (b). The question and the pleadings in relation to the renewal of the PMS policy for 1989-1990 raise the following two issues as to the truthfulness of the answer to question 13 (b) (ii):
Issue (1) Whether any of the partners, after enquiry, was aware of any of the circumstances set out in the twenty-six paragraphs in Part A (relating to the TAG facts) and the twenty-two paragraphs set out in Part B (relating to the TCF facts) of the Schedule (to FAI's third further amended statement of claim in the TAG insurance proceeding) (a copy of the Schedule was annexure A to Part I of these Reasons); and
Issue (2) If so, whether those circumstances of which any partner was aware satisfied the description "circumstance[s] which may give rise to a claim" in question 13 (b) (ii)?
The proposals of late April 1991 for renewal of the Chatswood and Gosford policies for 1991-1992 disclosed, relevantly, the McDonald, TAG and IPG claims, all of which had, by then, been made, but none of the TCF facts. The alleged misrepresentations arising from those two proposal forms relate to the TCF facts alone.
In one respect, the twenty-two paragraphs in Part B of the Schedule to FAI's further amended defence to TCF's amended points of claim in the TCF insurance proceeding, describing TCF facts which FAI contends McS and Cullen knew to a substantial extent in April 1991 but failed to disclose in the two proposals then made for renewal of the Chatswood and Gosford policies, go beyond pars 1-22 in Part B of the Schedule to FAI's third further amended statement of claim in the TAG insurance proceeding, that is to say, the twenty-two paragraphs describing TCF facts which FAI contends McS knew but failed to disclose in the earlier proposal dated 22 May 1989 for renewal of the 1989-1990 PMS policy. The difference relates primarily to the examination of McS, Beale and Cullen under s 541 of the Companies Code relating to the affairs of Travel and Wheels, which had taken place between the times of the proposal in 1989 and those in 1991. Paragraph 22 of Part B of the Schedule (in the TAG insurance proceeding) reads simply:
"22. Mr McSweeney, Mr Beale and Mr Cullen had been notified that they were to be examined pursuant to s. 541 of the Companies Code in relation to the affairs of (inter alia) Travel."
This paragraph is merely to the effect that as at the date of the original proposal, 22 May 1989 (I will, for convenience, refer throughout to the dates of the three proposals for renewal - the policies were renewed shortly afterwards and without any relevant change of circumstances), all three accountants had been notified that they were to be examined. As will appear later, I am not satisfied that they had been notified by that date (or by the renewal of the PMS policy on 20 June 1989). But all that need be noted for present purposes is that by late April 1991, the s 541 examinations having been completed some months earlier, the counterpart par 22 in Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding, is extended as indicated in bold below:
"22. Mr McSweeney, Mr Beale and Mr Cullen had, in about mid 1989, been summonsed for examination pursuant to s.541 of the Companies Code in relation to the affairs of (inter alia) Travel; had retained solicitor and Counsel who had appeared for them at the examination; and had been examined, including by Counsel for TCF, over a number of days in November 1989 and July 1990 concerning, inter alia, PMS's activities in relation to Travel's 1987 accounts (including the management fees) and Travel's July-December 1988 financial position and the extensions of time." (emphasis supplied)
If I should conclude that any of the negative answers to question 13(b) (ii) was untrue, as FAI submits, it may not follow that the resulting untrue statement was a "misrepresentation" for present purposes. This is because subss 26 (1) and (2) of the IC Act provide:
"26. (1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that he held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation.(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."
The further issues arising from s 26 and the pleadings in relation to the alleged misrepresentations in the three proposals are:
Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS (or Cullen, in the context of the 1991 Gosford proposal), as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held?
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that McS (or Cullen, in the context of the 1991 Gosford proposal), as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would be relevant to FAI's decision whether to accept the risk, and, if so, on what terms?
General issues relating to non-disclosure
Subsection 21 (1) of the IC Act is as follows:
"21. (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, 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 whether to accept the risk and, if so, on what terms; or
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant."
In relation to the alleged non-compliance with the statutory duty of disclosure, the issues posed by subs 21 (1) of the IC Act and the pleadings are:
Issue (5) Were the relevant matters known to the insured?
Issue (6) If so, as to all or any of them, were they
(i) matters which the insured knew to be matters relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances could be expected to have known to be matters so relevant?
The alleged 7 May 1990 representations
In relation to renewal of the Chatswood policy for the year 1991-1992, there is a complication. In relation to that renewal, FAI relies, not only on the proposal dated 28 April 1991 signed by McS, but also on alleged misrepresentations made by McS a year earlier when he submitted to FAI the proposal dated 7 May 1990 and its attachments, in connection with the renewal of the PMS policy for the year 1990-1991. Those alleged misrepresentations relate to the TAG facts. FAI's complaint in this respect is not that McS did not disclose the TAG claim: the TAG claim was disclosed by McS in answer to question 13 (a) of the proposal of 7 May 1990 just as it was a year later in answer to the same question both by Cullen in the proposal dated 22 April 1991 for renewal of the Gosford policy, and by McS in the proposal dated 28 April 1991 for renewal of the Chatswood policy. In fact, the TAG proceeding had been launched in January 1990; FAI had granted indemnity in respect of it; and TCM, instructed by FAI, were representing McS and Phillips, by 7 May 1990. In substance, FAI's complaint is that in the proposal dated 7 May 1990, and, in particular, in documents attached to it, McS made five representations touching certain aspects of the TAG facts ("the 7 May 1990 representations") which were untrue. The 7 May 1990 representations as pleaded were set out in Part I of these Reasons and each is repeated later in this Part (IV).
The following issues arise on the pleadings in relation to the 7 May 1990 representations:
Issue (7) Did McS make the 7 May 1990 representations as pleaded?
Issue (8) If "yes" to Issue (7), were the 7 May 1990 representations untrue?
Issue (9) If "yes" to Issue (8), have TCF and PMS Chatswood nonetheless established that the 7 May 1990 representations were made on the basis of a belief in fact held by McS, as the person signing the proposal form, being a belief that a reasonable person in the circumstances would have held?
Issue (10) If "yes" to Issue (8), has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the making of the 7 May 1990 representations would be relevant to FAI's decision whether to accept the risk, and, if so, on what terms?
Effect under section 28 of the IC Act on misrepresentation and failure to comply with duty of disclosure
Section 28 of the IC Act deals with the effect of a misrepresentation or a failure to comply with the statutory duty of disclosure. The section is as follows:
"28. (1) This section applies where the person who became the insured under a contract of general 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 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 failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made."
Section 28 proceeds on the assumption that a misrepresentation or failure has been established. The section and the pleadings raise the following issues:
Issue (11) Would FAI have entered into the contract of insurance for the same premium and on the same terms and conditions, even if the insured had not made the misrepresentation or failed to comply in the relevant respect with the duty of disclosure? (Section 28 (1) has the effect that if the answer is "yes", the remedies provided by subss 28 (2) and (3) are not available.)
Issue (12) If "no" to Issue (11), was the misrepresentation made fraudulently or was the failure to comply with the duty of disclosure fraudulent? (Section 28 (2) has the effect that if the answer is "yes", FAI acquired a right to avoid the contract.)
Issue (13) If FAI was not entitled to avoid the contract, or, being entitled to avoid it, did not do so, to what amount, if any, is FAI's liability in respect of the claim to be reduced pursuant to s 28 (3) of the IC Act, as the amount that would place it in the position in which it would have been if the misrepresentation had not been made or the failure to comply with the duty of disclosure had not occurred?
FAI's primary position in relation to all three policies is that if the alleged misrepresentations had not been made and the alleged failure to comply with the duty of disclosure had not occurred, it would not have entered into the relevant contract of insurance, and that the amount referred to in Issue (13) is therefore "Nil". But FAI also submits, in the alternative, that under any contract of insurance into which it would have entered, it would not have been liable to indemnify in any event, because of Exclusion (g) in its form of professional indemnity policy. This submission calls for some elaboration.
Standard printed Exclusion (g) which formed part of the PMS policy, the Chatswood policy and the Gosford policy, is, relevantly, as follows:
"Except as provided for in those extensions for which limits are stated in the Schedule this Policy shall not indemnify the Insured in respect of any claim against the Insured:...
(g) arising out of claims and circumstances noted on the proposal form for the current period of cover or on any previous proposal form; ..."
It is convenient also to note here standard condition 2:
"2. The Insured shall as a condition precedent to his or their right to be indemnified under this Policy to give [sic] to the Company immediate notice in writing:(a) of any claim made against him or them; or
(b) of the discovery of reasonable cause for suspicion of fraud or dishonesty on the part of any of his or their employees partners or co-directors whether giving rise to a claim or not, and shall in any case, upon request, give to the Company such information as the Company may reasonably require."
The scheme of FAI's standard form of policy in relevant respects was considered by the Full Court of the Supreme Court of Western Australia in FAI General Insurance Co Ltdv Hendry Rae & Court (1993) 10 WAR 322 ("Hendry Rae"). In that case, a claim against an insured firm of accountants had been threatened, notified to FAI, FAI had closed its file and, apparently, the matter had "passed into history". In a proposal for renewal of the insurance some years later, the former possible claim was not disclosed in answer to question 13 (a), and question 13 (b) (ii) was answered "No". During the year, a claim was made arising out of the same circumstances.
The trial Judge (Anderson J), and on appeal all members of the Full Court (Malcolm CJ, Pidgeon, Franklyn JJ), thought that the answer to question 13 (a) had constituted a misrepresentation. There was no question of fraud. The trial Judge, and on appeal Pidgeon J, dissenting, thought that s 28 did not apply, while the majority in the Full Court (Malcolm CJ and Franklyn J) thought that it did.The majority held that if the details called for by question 13 (a) had been provided, because of the exclusion to which I have referred, FAI would not have been entering into the contract for the same premium and on the same terms and conditions, with the result that s 28 applied. The trial Judge and Pidgeon J, on the other hand, thought that the contract of insurance itself would have been no different; that the difference would have been only in its effect or operation; and that, in consequence, s 28 did not apply. The majority in the Full Court held that FAI's liability was reduced to nil by reason of the operation of s 28 (3) and the supposed exclusion upon the hypothesised correct answer to question 13 (a).
FAI's alternative submission to its submission that s 28 (3) operates to reduce its liability to nil, is that I should resolve Issue (13) by holding that FAI's liability would have been reduced to nil in accordance with the approach taken by the majority in Hendry Rae.
MISREPRESENTATION GENERALLY
In my view, the expression "circumstance which may give rise to a claim" conveys an objective notion, that is, the notion of a circumstance which, as a matter of objective fact, possesses the quality that it "may give rise to a claim". Question 13 (b) (ii) does not require that the proponent for insurance be aware of both the circumstance and of the fact that it possesses that quality. This approach is well supported (see, for example, Bowling v Weinert [1978] 2 NSWLR 282 (Lee J) and the cases there referred to, especially Bayer Leverkusen Ltd v Phoenix Assurance Company (unreported, NSWCA, Moffitt, Hardie and Hope JJA, 19 March 1973); EST Limited v HIH Casualty and General Insurance Ltd (unreported, SCVic, No 6938 of 1994, Mandie J, 27 October 1997); Sutton, Insurance Law in Australia (2nd edn, 1991) at 796). Accordingly, the question is whether, as at the date (22 May 1989) of the proposal for renewal of the PMS policy for 1989-1990, those of the TAG or TCF matters described in the Schedule of which a partner of PMS was aware, were circumstances which, considered objectively, satisfied the description of "circumstance[s] which may give rise to a claim". A similar question, with necessary modifications, is to be asked in relation to the proposal dated 22 April 1991 signed by Cullen for renewal of the Gosford policy and the proposal dated 28 April 1991 signed by McS for renewal of the Chatswood policy.
The character to be possessed is described by reference to a "claim". What is the relationship between the known circumstance and the hypothesised "claim" that is signified by the phrase, "may give rise to"?
TCF and PMS submit that there must be some form of direct demand or complaint. In support, Holts Corrosion Control Pty Ltd v CML Fire & General Insurance Co Ltd (1984) 3 ANZ Cas 60-559 (SCQld, Macrossan J) ("Holts Corrosion") is relied upon. In Holts Corrosion, Macrossan J had to construe condition 1 of a policy which provided:
"`Notice in writing shall be given as soon as possible to the Company of(a) Every occurrence, claim, writ, summons, proceeding, impending prosecution, inquest and all information in relation thereto in respect of which there may arise liability under the Policy ... that shall come to the knowledge of the insured. Such notice shall be given by the insured ..."
In addition to the differences between the terms of this condition and those of question 13 (b) (ii) of FAI's proposal form, the factual context of the case was different from that of the present one. Holts Corrosion did not concern a proposal for a claims made and notified policy but a term of a policy already on foot which required prompt notification to the insurer of occurrences of the kind described, during the currency of the policy.
The insured had been spray painting in the course of its business. There had been complaints, which had been forwarded on to the insured by the company that had engaged it, by vehicle owners of damage to their vehicles from "overspray". No demands for compensation had been made.
Macrossan J held that the insured had not failed to satisfy condition 1. His Honour noted that no-one had come to the insured directly and complained, let alone demanded, that the insured pay compensation. He further referred to the "flavour of legal formality" suggested by the collocation of words "claim, writ, summons, proceeding, impending prosecution, inquest". His Honour finally said that the expression "in respect of which there may arise liability under the `Policy'" made it clear that what had to be considered under condition 1 was:
"not the mere possibility of a claim against the insured, but the possibility of an established liability on the part of the insurer." (at 78, 372)
Macrossan J concluded that, in context, it was necessary that the occurrence involve at least "the assertion of a claim against the assured", and that it involve something more than "mere activity about to be undertaken by the insured which might thereafter result in some demand being made upon him in connection with damage which may be caused" and "even more than the occurrence of damage to property which might thereafter result in a demand being made upon the insured" (emphasis in Judgment).
Question 13 (a) in the FAI proposal form refers to events during the preceding ten years. These are the making of a claim, the alleging of negligence, and the notification to insurers of circumstances that might give rise to a claim. Question 13 (b) is concerned with less definite concepts. The question begins,
"(b) Are any of the Partners, AFTER ENQUIRY, aware of:"
and the first matter described is
"(i) Any accounts overdue for payment where there is reason to believe the Client is dissatisfied with the professional services rendered?" (emphasis supplied)
followed by the critical par (ii):
"(ii) Any claim or circumstance which may give rise to a claim against the Firm(s) or any prior Firm(s) or any of the present or former Partners/Directors/ Consultants which matter is not referred to in Question 13 (a) above?" (emphasis supplied)
It is not obvious, in view of question 13 (a), why this paragraph begins "[a]ny claim". It could hardly have been intended to catch claims made more than ten years earlier. Perhaps it was sought to emphasise, as question 13 (a) does not, the necessity for enquiry of all partners in respect of claims already made.
It assists, perhaps, to state the obvious: if it could be known that a circumstance definitely would or would not give rise to a claim, question 13 (b) (ii) would or would not, respectively, catch it. But neither possibility, lying in the future, can be known as a certainty. The question is: What degree of likelihood that a known circumstance will give rise to a claim, is signified by the expression "circumstance which may give rise to a claim" in question 13 (b) (ii)?
The commercial context and object of the proposal must be borne in mind (see Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 840 (McGarvie JA, with whom Kaye and Ormiston JJA agreed) and cases there cited, and Sutton, Insurance Law in Australia (2nd edn, 1991) at 792). Every time an accountant prepares accounts or an auditor performs an audit, there is the possibility of a claim. Moreover, where loss is suffered as a result of a business failure, it is not uncommon for a loss sufferer to search for and target persons having some connection with the business who are insured. But question 13 (b) (ii) does not, in my opinion, require a proponent to engage in surmise and speculation or to disclose every mere possibility of the making of a claim.
In Hendry Rae, Pidgeon J discussed the meaning of the expression "circumstance which may possibly give rise to a claim" in the exclusion clause to which I referred earlier in my discussion of that case. His Honour saw that expression as referring to "a known deficiency likely to result in a casualty" (at 347). His Honour continued:
"The policy covered claims made during its currency. The insurer would wish to exclude claims that are likely when the proposal is completed. To go to extremes, if a ship had foundered with potential claims when the survivors reached shore, but if such claims had not been made when the proposal was filled out, then the foundering of the ship would be a circumstance which may result in a claim. Clearly an insurer would not accept the risk of indemnifying the insured when the claim was later, in fact, made. That fact must be disclosed as a circumstance. I would see the phrase intending to cover a similar area to the phrase `any occurrence which might give rise to a claim,' when a policy requires such matter to be reported during the currency of the policy. ... there must be an occurrence looked at objectively which may give rise to a claim. Applying this to a professional indemnity insurance, if it had become known to a partner that he had made a serious mistake in writing a report such as using a wrong valuation, this would be a circumstance necessary to disclose." (emphasis supplied)
It will be recalled that in Hendry Rae, a claim threatened years earlier appeared to have been abandoned. In relation to the significance in this context of question 13 (b) (ii), Pidgeon J agreed with the trial Judge's conclusion that the negative answer given to the question was not a misrepresentation, because, at the time of completion of the proposal, the insured accountants were not "still aware of any claim or circumstance which may give rise to a claim against them by [their former client]" (quoted by Pidgeon J at 347). His Honour referred to the standard form of exclusion, to which I also referred earlier, and said:
"The policy does cover an event that occurred prior to the commencement of the policy if the claim is made during the currency of the policy provided that the claim in respect of that event was not already under way at the time the proposal is being completed and provided that `circumstances' giving rise to a likely claim are not known to the proposed insured." (at 348 - emphasis supplied)
Question 13 (b) (ii) in the proposal form, and standard Exclusion (g), are clearly directed to the making of claims against the insured with which FAI will have to deal, not merely such claims as may have prospects of success. It must be remembered, however, that the parties must be taken to have intended that the insurance cover be effective. It might be suggested in respect of claims made and notified policies that:
(a) the proponent insured will always be aware of those circumstances which, it transpires, have given rise to the making of a claim during the period of the policy;
(b) ex hypothesi, that claim has given rise to a legal liability on the part of the insured to pay compensation for a form of legal wrongdoing falling within the terms of the insuring clause of the policy;
(c) ex hypothesi, a reasonable person would have understood that those circumstances might give rise to a claim;
(d) it follows that the insurer under such a policy will never be liable unless the circumstances occurred during the period of the insurance.
A submission along these lines would be rejected because it would accord to the expression "may give rise to a claim" the meaning "would be recognised by a reasonable person who thought about it as possessing the capacity to give rise to a claim" - a meaning so favourable to the insurer as to deprive the policy of commercial effectiveness.
PMS submit that it is only facts down to the time of the accrual of the relevant cause of action against the insured that are to be regarded. I reject the submission. Facts down to the date of the proposal are relevant to the question whether the earlier circumstances known to the proponent "may give rise to a claim". If PMS's submission were to be accepted, facts occurring even shortly prior to the proposal, such as a formal release of a claim on the one hand or the making of threats of a claim on the other, would, alike, have to be ignored. This result is clearly not intended.
In my opinion, it is not desirable to attempt to define precisely the shade of meaning signified by the expression "may give rise to a claim". The appropriate connection between the known circumstances and the claim referred to in question 13 (b) (ii) is, perhaps, best described by saying that circumstances "may give rise to a claim" if they would, as at the time of the proposing of the insurance, immediately suggest to a reasonable person in the proponent insured's position who reflected upon those known circumstances, that the bringing of a claim against the insured in respect of them was a "definite risk" or a "real possibility" or "on the cards". Perhaps the notion of the "springing to mind" of the making of a claim also appropriately expresses the shade of meaning intended.
The expression is concerned with the making of a claim as distinct from the mere existence of legal liability. Ordinarily it can be expected that what will be known will include the fact that the circumstances have actually led a person at least to contemplate the making of a claim. However, I do not exclude the case where the underlying circumstances establishing liability themselves, of their nature, would prompt a reasonable person immediately to foresee the making of a claim as a real possibility. In such a case, the length of time that has passed without any suggestion of a claim and the degree of obviousness of liability may assume importance (cf the hypothetical case described by Pidgeon J in Hendry Rae at 347).
RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED MISREPRESENTATION - THE TAG FACTS
Issue (1) Was any partner of PMS, after enquiry, aware, on 22 May 1989, of the circumstances referred to in pars 1-26 of Part A of the Schedule (to FAI's third further amended statement of claim)?
FAI's submissions relate only to an awareness on the part of McS. The word "aware" can mislead. A fact may be within a person's general knowledge but the person may not have had it "in mind" at a particular time or on a particular occasion. It is particularly important to bear this distinction in mind in a case where fraud is alleged. Fraud is concerned with subjective states of mind, not with facts known but forgotten, or known but overlooked. It is important also to recall the nature of the fraud which I have found in respect of the TAG facts. While its seriousness must not be understated, McS had never intended to "defraud" or "cheat" or "cause loss to" TAG.
But these distinctions are irrelevant to question 13 (b) (ii). Its terms are apt to catch circumstances forming part of a partner's general knowledge, albeit forgotten or overlooked.
Those paragraphs of Part A of the Schedule which call for comment are pars 16, 17, 20 and 26. Paragraph 16 is:
"16. PMS did not take adequate steps to verify that the cheques had been, or were about to be, presented and paid."
The concept of awareness of the inadequacy of the steps taken is problematical. While the statement is true as one of objective fact, and while McS was aware of what PMS had done and not done, in my view neither in 1987 nor when completing the proposal form on 22 May 1989, did McS hold the opinion that PMS had failed to take adequate steps to verify that the cheques had been, or were about to be, presented and paid. While I accept that it is not necessary in order for the notion of a "circumstance which may give rise to a claim" to apply, that McS should have had a circumstance present to his mind as at 22 May 1989, it is not met, in my opinion, by a situation such as the present one, in which, in my view, McS is not shown ever to have held the opinion down to 22 May 1989, that PMS had not taken adequate steps to verify that the cheques had been, or had been about to be, presented and paid.
But even if I had thought otherwise, for reasons appearing later, I would not have concluded that the failure to take adequate steps satisfied the description of a "circumstance which may give rise to a claim" as at 22 May 1989.
Paragraph 17 of Part A is:
"17. On 29 July 1987, McSweeney did not know or believe that the cheques had then been presented or paid."
At the time of delivery of the preliminary accounts to Wu at Rosenblums' office on Wednesday 29 July 1987, McS did not know that the cheques had been presented or paid. He could not have known that they had been, because they had not been. However, it will be recalled that earlier on the same day, PMS, through Yip, received "the information" from Beazley and it was entered into TIIB's journal. McS believed that before telephoning the information through to Yip, Beazley would have made corresponding entries in the relevant records at the Toikan office. It will be recalled that McS's evidence was:
"I also believed that at the time he made Toikan's entries, he had drawn cheques to effect the transactions, and that he would cause such cheques to be presented and paid shortly thereafter."
I find that at the time of the meeting at Rosenblums' office late on Wednesday 29 July, McS "believed" that Beazley had drawn the cheques and either had already caused them, or was about to cause them, to be presented and paid. That is to say, I find that his state of mind at the time of the meeting and handing over of the preliminary accounts to Wu, was that the misrepresentation contained in the preliminary accounts as to the position of the broking accounts as at the preceding 30 June had just been "remedied" or was about to be "remedied". A belief that the cheques had in fact already been presented and paid earlier in the day is inconsistent with the matter described in par 17 of Part A. I am not persuaded that McS did not have that belief by the time of the meeting.
I am therefore not satisfied that as at 28 May 1989, McS was aware that he had not, on 29 July 1987, believed that the cheques had by then been presented or paid.
Paragraph 20 of Part A is:
"20. At all material times, there was no reasonable basis for Mr McSweeney believing that the cheques would be met otherwise than out of the proceeds of the acquisition."
It will be recalled that on the basis of the money in the accounts of TIBG, Penklis ultimately conceded that there was a shortfall of only $80,271 and McS ultimately conceded that there was a shortfall of only $77,791. I say "only" to emphasise the vast difference between these figures on the one hand and those which FAI, at the beginning of the hearing, supported as representing the amount of the shortfall. Would it have been reasonable for McS to believe that Webber would provide an amount of the order of $80,000 from sources other than the proceeds of the acquisition? I accept that McS believed that Webber's wife and her family were wealthy. He gave evidence of what his belief was as to the assets of Webber and his wife and their value. The total, not supported by evidence, was $7,150,000. Mrs Webber owned the family home at 2 Bangalla Road, Rose Bay, over which we know she was prepared on 3 September 1988 to agree to give a second mortgage as security for payment of the amount of $2,232,145.54 which Webber then undertook to pay to TKN as representing the amount of the deficiencies. While the evidence does not positively establish that a sum of the order of $80,000 would have been forthcoming, I am not satisfied that there was no reasonable basis for McS to believe that an amount of that order would be provided otherwise than out of the proceeds of the acquisition. In any event, neither in 1987 nor as at 22 May 1989, was McS aware that there was no reasonable basis on which he could believe that the cheques would be met otherwise than out of the proceeds of the acquisition.
Paragraph 26 of Part A is:
"26. In respect of the period in which the transaction with Tag took place, PMS submitted on behalf of TIIB, CJ & H and C & G, applications to the Insurance Commissioner pursuant to the Insurance (Agents and Brokers) Act for registration as insurance brokers, stating in answer to a question in the application form, that the auditor was not a partner of an officer of the Applicant whereas in each case Mr Phillips was the auditor and his partner, Mr McSweeney, was a director."
The matters referred to in this paragraph did not form any part of the facts on the basis of which TAG made its claim against PMS. The "period in which the transaction with Tag took place" might be seen to extend from April 1987 to 2 November 1987. The paragraph appears to refer to the applications that were made in December 1987 - after the acquisition was settled on 2 November. The applications stated that the auditor was not a partner of any officer of the company in question.
In fact, during the period mentioned, McS was a director of TIIB, CJ & H and C & G, while his partner, Phillips, was their auditor. However, the accounts submitted in December 1987 were signed by McS himself as auditor. He claimed that this was an "administrative error".
The application which had been submitted to the Insurance Commissioner in June 1986, on the other hand, had been supported by accounts signed by Phillips as auditor. McS gave evidence in this respect that Wallis had contacted the Insurance Commission's office and had been told that it was "appropriate" for the applications to be submitted, notwithstanding the misrepresentation that they would contain. In his statement of 23 June 1995, Wallis said that he had spoken to an officer of the Commission and informed him that Phillips, who was in Gosford, would be conducting the audit and that McS's Sydney practice was quite separate from that of Phillips, despite the fact that the two men were partners. But in cross-examination, Wallis conceded that the work on the audit was in fact to be performed by himself and Yip, that they were in the Sydney office and that they normally reported to McS. He claimed that he also informed the officer of the Commission of these matters, and explained the absence of any reference to them in his written statement by saying that they "never occurred to me in making the statement", and that he "didn't see [them] as relevant".
Whatever the misrepresentations made to the Insurance Commission in June 1986 and December 1987, and whatever they may indicate as to the manner in which PMS carried on their practice, they are not relevant to any substantive issue in the case. (They are potentially relevant to credit, particularly that of Wallis, but that is another matter.) TAG did not rely on the statements; nor is any reliance on them by the Insurance Commission shown to have had any connection with the loss suffered by TAG. They form no part of "circumstance[s] which may give rise to a claim." They therefore need not be considered further.
In the result, subject to what I have said above, the circumstances set out in Part A of the Schedule of which McS was "aware" in the (relevant) sense that they formed part of his general knowledge, as at 22 May 1989 were those described in pars 1-15, 18, 19 and 21-25. It is necessary to say "subject to what I have said above" since, on 22 May 1989, McS believed that the cheques had been drawn on 29 July 1988 (cf pars 11 and 12 of Part A of the Schedule).
Issue (2) Did those circumstances described in Part A of the Schedule (to FAI's third further amended statement of claim) of which any partner of PMS was aware on 22 May 1989, satisfy the description of "circumstance[s] which may give rise to a claim" in question 13 (b) (ii)?
It is not amiss to repeat that it is important to guard against the wisdom of hindsight: we now know that PMS's conduct as part of the TAG facts had the capacity to give rise to a successful claim against the firm. But it is necessary to confine attention to the position as at 22 May 1989.
FAI submits that the question posed should be answered "yes" for the following reasons:
"(1) the very nature of PMS's Tag conduct was pregnant with the possibility of serious consequences, and recriminations;(2) Tag regarded its losses on the purchase of the Toikan companies as matters in respect of which it was entitled to compensation from someone, and in the first place the Webber interests;
(3) the Webber interests at least might not be able to satisfy all of TAG's claim;
(4) Tag's refusal to pay substantial fees to PMS, the letter of 2 June and meeting of 16 June 1988, and the meeting of 7 April 1989, suggested that Tag was most dissatisfied with PMS's role in the Toikan debacle, and in a way that sounded in money;
(5) Tag had given no assurance or even indication that PMS would not be sued;
(6) because of PMS's involvement in the purchase and in particular in the treatment of the outstanding cheques as cash at bank which was non-existent, they might as a real possibility, be seen by Tag as a claim target, whether or not PMS thought they would have good defences to such a claim."
FAI's reason (5) above can be disposed of shortly. A mere failure to give an assurance or indication that a claim will not be made does not suggest the making of one. Moreover, as PMS submit, the "dominant supervening circumstance, ... is that ... prior to January 1990 TAG gave no hint to [McS] that it thought the accountants might be liable, and the relationship between TAG and the accountants was co-operative and harmonious".
I turn to FAI's reasons (1) and (6). Both refer to PMS's conduct as part of the TAG facts as, of its nature, raising the spectre of a claim against PMS. But I think that this view is a product of hindsight, and also fails to give due weight to the fact that it is the making of a claim, not the existence of liability, which is the concern of question 13 (b) (ii).
It is true that PMS had issued preliminary accounts which contained a statement that they knew to be false and in reliance on which they intended TAG to act. But what were the indications as at 22 May 1989 that TAG might make a claim against PMS? It might be pointed out that by mid-1988, TAG had ceased to retain PMS. But no adverse inference should be drawn from this fact, as it had apparently been agreed as early as late 1987 that Moffitt's firm, Thompson Douglass Buttrell, who were Wu's accountants, would take over from PMS.
Wu's evidence in cross-examination before me was that McS was "co-operative with [him] in [his] investigations" and "appeared to be as helpful as [Wu] would have wished in trying to assist [Wu] in relation to" the question of the unpresented cheques. Evidence was also given by Chalker and Moffitt, who were also involved in the questioning of McS, to the effect that he was helpful, forthcoming, co-operative, open, frank and honest. Such a stance is difficult to reconcile with an awareness on McS's part that TAG was contemplating making a claim against PMS or was viewing PMS as responsible for its loss. Indeed, Wu agreed that, prior to January 1990, McS was given no indication that PMS might be sued. While McS's apparent state of mind at the time does not directly bear on the issue whether the circumstances bore the character of which question 13 (b) (ii) speaks, it does so indirectly by providing some evidence that a reasonable person in McS's situation at the time would also not have understood that TAG was contemplating making a claim against PMS or was viewing PMS as responsible for its loss.
FAI submits that disharmony is revealed by what happened at two meetings. The first was a meeting on 16 June 1988. Wu gave affidavit evidence of what occurred. Those present were McS, Webber, Moffitt, Wallis and Yip. Wu explained the conclusions which TAG had reached as to the extent and origin of "the cash deficiencies in the accounts". He invited a response from Webber and McS. McS agreed with a statement by Wu that the cheques had not been deposited, but added, "we do not agree with your final sum". According to Wu, McS contended that Webber owed much less than the amount claimed by Wu. This stance was consistent with the view which McS had always held, and continued to hold, that after all available moneys were brought to account, there was either no shortfall or only a small one, which Webber, his wife or her family would have no difficulty in making up. According to Wu, he (Wu) became "annoyed with the unsatisfactory answers [he] was being given and felt unable to continue with the discussion [and] left the room". He returned later.
It seems clear that Wu's feeling of annoyance was related to McS's insistence that his (Wu's) figures were incorrect, while he (McS) was unable to substantiate his contention that the amount of any shortfall must be much less than Wu's figure. In my opinion, there was no reason to think that Wu's annoyance in this respect was suggestive of the making of a claim by TAG against PMS.
The second meeting to which FAI refers occurred on 7 April 1989. On that day, McS met with Wise, Wu, Buttrell, Webber and Turner. According to McS's contemporaneous note, Wise appeared to be concerned that TAG was in a serious financial plight and was possibly insolvent. According to McS, Wise considered that there were two possible reasons: first, that the accounting methods used by the company were misleading; and second, the "Webber loans". In cross-examination, it was put to McS that Wise "was complaining about the accounting systems that had been in the company all along". McS denied this, saying in response to a similar question, that he understood Wise's complaint to be that the accounting systems TAG was using did not give him (Wise) a true picture of the cash position. McS's evidence was consistent with his contemporaneous note, that "the rapid deterioration of business must reflect on the state of financial management of the Company over the last eighteen months" (that is, since completion of the TAG acquisition).
As for the "Webber loans", McS testified that this was a reference to amounts totalling $975,000 drawn out of the companies by Webber after 30 June 1987, and that it was not a reference to the inter-company debts already existing at that date. This is a plausible explanation and there does not appear to be any evidence contradicting it.
Therefore, there appears to be nothing in the 7 April 1989 meeting that should have suggested to McS that TAG was dissatisfied with anyone or anything other than its own accounting practices and Webber. In particular, there was nothing in the meeting to indicate that TAG would or might demand compensation for its losses from PMS.
FAI's reason (2) PMS knew that TAG was looking for compensation. However, as noted in Part II, TAG was looking to Webber. By the deed dated 3 September 1988, Webber assumed responsibility for, and agreed to pay, the amount of the deficiencies which had existed in the broking and general accounts of the members of the Toikan Group as at 1 July 1987, agreed in the deed to be $2,232,145.54. Payment by Webber of this amount was guaranteed and secured by Webber's wife and Webber family companies. PMS were not parties to the deed and no-one had ever suggested they should be. Subsequently, such as at the meeting on 7 April 1989, only some six weeks before McS signed the proposal form on 22 May 1989 for renewal of the PMS policy, reference was made to the making of demand on Webber, but there was still no suggestion of a liability in PMS.
So far as the evidence reveals, TAG was taking the view that the amount of its losses was recoverable from Webber alone.
FAI's reason (3) As previously noted, McS believed Webber to be a man of considerable means (a belief shared by Wu). McS's understanding was that Webber and his wife had gross assets of around $7,150,000. It is not shown that McS had no reason to believe that Webber would not be able to satisfy all of TAG's claim. But even if this had been shown, it would not have led to the result contended for by FAI. To reach that result, the proponent-insured would have had to engage in a process of surmise and speculation which is foreign to question 13 (b) (ii). TAG had been content on 3 September 1988 to accept Webber's covenant to pay $2,232,145.54 supported by his wife's and family companies' guarantees and securities. Let it be assumed that if McS had investigated the position, he would have found that the securities were inadequate. It would not follow that the circumstances known to McS were such as to attract the description "which may give rise to a claim" against PMS. Much more would be required before that conclusion could be reached.
The execution of the deed on 3 September 1988 by Webber, his wife and family companies, followed by the absence of any claim by TAG against PMS down to McS's signature of the proposal form on 22 May 1989, is itself, incidentally, itself strong evidence that as at the latter date, a reasonable person in McS's circumstances would not have regarded a claim by TAG against PMS as being a "real possibility".
FAI's reason (4) I have dealt above with the meetings on 16 June 1988 and 7 April 1989. In its reason (4) FAI also refers to TAG's refusal to pay substantial fees to PMS and "the letter of 2 June". The reference is to a letter in Webber's name (although in fact signed by someone else) for and on behalf of TIIB to PMS dated 2 June 1988. In substance, the letter was as follows:
"Further to our telephone conversations over the past weeks, and various visits I now enclose a cheque for $44,462.51 in settlement of all accounts between your firm and the Toikan Group. This amount is made up as follows:-Total Outstanding as advised by you $102,962.51
Less Amount in Dispute $ 58,500.00
Balance Herewith $ 44,462.51
I have already advised you that the fees charged are well in excess of what we consider to be reasonable fees for the services performed and in your various meetings with Harvey Wu the reasons for our opinion have been conveyed to you. The Board of Toikan are firm in their view that the fees should be reduced and this settlement offer is made without prejudice to our rights, if the offer is rejected, to take the approach that you should in fact be entitled to an even smaller remuneration without waiver of any other rights which we might have. I trust that you will see reason and accept this cheque in full and final settlement of all outstanding accounts between your firm and the Toikan/Tag Group.
If you do not agree to accept this cheque we will be forced to take such action as our legal advisors consider appropriate." (emphasis supplied)
FAI submits that the letter conveyed a threat by TAG of a claim against PMS.
There was no evidence before me that any one on behalf of TIIB or TAG had identified any particular reason why the amount of fees charged by PMS was said to be excessive.
FAI relies on the letter's reference to TAG's being "forced to take ... action" and to TAG's "other rights", and submits that "[TAG] was most dissatisfied with PMS's role in the Toikan debacle, and in a way that sounded in money". However, the letter is ambiguous. Its terms relate only to a dispute about fees, and give as the reason for the dispute, not impropriety or negligence on the part of PMS, but that "the fees charged [were] well in excess of what [TAG] consider[ed] to be reasonable fees for the services performed".
I do not conclude from the letter that TAG was disputing PMS's entitlement to fees on the basis of negligence or other conduct of the firm giving rise to a liability on its part, as distinct from the more innocuous basis that the fees were exorbitant in amount, or had been charged in respect of work not done. Indeed, given that the letter was in Webber's name, although not signed by him, it is not to be expected that it was intended to refer to accusations against PMS, at the heart of which was Webber's own misconduct.
Moreover, even if TAG was making accusations of negligence or other wrongful conduct against PMS, those allegations were made only in relation to PMS's claim for fees, yet PMS accepted the cheque enclosed in satisfaction of their claim and wrote off the remainder. Whether or not the writing off shows a "guilty mind", as submitted by FAI, the fact is that there is nothing in the letter which would suggest to McS or to a reasonable person in his position, that TAG was seeking to recover from PMS the amount of any losses resulting from the deficiencies in the broking accounts. The letter referred to reducing the fees even further, but did not suggest that TAG did not owe PMS anything or that PMS was liable in damages in an amount exceeding the amount of the fees claimed. Rather, so far as the letter suggested, PMS's acceptance of the amount paid put an end to the dispute between TAG and PMS referred to in it. This view is strengthened by the fact that the matter was not raised again when Webber, by the deed dated 3 September 1988, undertook to make good TAG's loss.
In these circumstances, even if McS had once known, or a reasonable person in his position ought to have once known, that PMS's conduct had been such that there was a real possibility that TAG would make a claim against PMS, it should be accepted that by 22 May 1989 McS did not still believe, and a reasonable person in his position would not have still believed, that TAG would or might, as a real possibility, yet make such a claim.
Mention should be made of one further submission made on behalf of PMS, relating to condition 3 of the PMS policy. Condition 3 provided that if, during the subsistence of the policy, PMS should become aware of "any occurrence which may subsequently give rise to a claim against [PMS] for breach of professional duty by reason of any negligence, ..., and [should] ... give written notice to [FAI] of such occurrence", then any claim which might subsequently be made against PMS arising out of such negligence should be deemed to have been made during the subsistence of the policy. According to PMS's submission, if McS had thought in 1988 that TAG was likely to make a claim against PMS, it is "intrinsically probable" that he would have notified FAI of the fact in order to take advantage of Condition 3 under the then subsisting policy. In response, FAI submits that it should be inferred that McS failed to notify FAI of the matter because it involved dishonesty on his part. In the end, I do not need to deal with PMS's submission, which would or might require consideration of McS's awareness of Condition 3, his practice in relation to other occurrences satisfying the description in that condition, or both. I make it clear, however, that I do not accept FAI's submission in reply.
I conclude that as at 22 May 1989, those circumstances referred to in Part A of the Schedule (to FAI's third further amended statement of claim) of which McS was aware did not satisfy the description in question 13 (b) (ii) in the proposal form, of "circumstance[s] which may give rise to a claim [against PMS]". In reaching this conclusion I have taken into account the possibility that the matters relied on by FAI taken individually might not, while taken together might, satisfy that description.
Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have PMS nonetheless established that McS, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held?
If I should be wrong in my conclusion on Issue (2), I am satisfied that McS answered "no" to question 13 (b) (ii) on the basis of his belief that the circumstances known to PMS were not such as satisfied the description "circumstance[s] which may give rise to a claim". However, the supposed untruth of the answer "no" dictates a conclusion that that is not a belief that a reasonable person in the circumstances would also have held. Accordingly, s 26 (1) of the IC Act does not operate to require that the supposed untrue answer "not be taken to be a misrepresentation".
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that McS, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAI's decision whether to accept the risk, and, if so, on what terms?
If I should be wrong in my conclusion on Issue (2), it is clear in my view that McS knew, and also that a reasonable person in the circumstances could be expected to have known, that the answering of question 13 (b) (ii) "no" would be relevant to FAI's decision whether to accept the risk, and, if so, on what terms. It is sufficient to say that the question was asked and required to be answered in FAI's standard proposal form, being a proposal form for a claims made and notified policy. Accordingly, s 26 (2) of the IC Act does not require that the answering of question 13 (b) (ii) in the negative be not taken to be a misrepresentation.
RENEWAL OF THE PMS POLICY FOR 1989-1990 - ALLEGED NON-COMPLIANCE WITH STATUTORY DUTY OF DISCLOSURE - THE TAG FACTS
FAI submits that the statutory duty of disclosure required disclosure of the same matters described in Part A of the Schedule.
Issue (5) Were the matters described in pars 1-26 of Part A of the Schedule (to FAI's third further amended statement of claim) known to PMS as at 22 May 1989?
I answered this question when dealing with PMS's awareness of the matters referred to in the same twenty-six paragraphs for the purpose of resolving Issue (1).
Issue (6) As to all or any of those matters in Part A of the Schedule which PMS knew, were they
(i) matters which PMS knew to be matters relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant?
FAI's submissions on this issue relate only to McS. FAI submits that those matters in Part A of which McS was aware were matters that satisfied both pars (i) and (ii) of Issue (6). In support, FAI relies on its reasons (1)-(6) noted earlier in the context of my discussion of FAI's case of misrepresentation arising from the answering of question 13 (b) (ii) and the declaration of truth in the proposal form, together with its submissions relating to Issue (4) which I have dealt with above. I then gave reasons why I do not accept that those six reasons show that the Part A matters known to PMS did not engage the description "circumstance[s] which may give rise to a claim" in question 13 (b) (ii).
FAI has not submitted that the duty of disclosure was enlivened otherwise than because the known Part A matters satisfied that description. Accordingly, I need not consider whether PMS was under a duty to disclose those matters on any other basis. It is appropriate to note, however, that those of the Part A matters of which I have found McS was aware, excluding as they do the matters referred to in pars 16, 17 and 20, are, perhaps, fairly innocuous.
In relation to the matters in FAI's submissions, quoted above, TCF and PMS submit, and I agree, that none of the matters in par (1) advances FAI's submission. It is entirely consistent with proper conduct in relation to the 1987 audit.
Paragraph (2) deals with the newspaper article of 24 December 1988. For the reasons discussed in relation to the 1989 proposal, this article did not suggest that there might be a claim against Phillips, by reason of PMS's 1987 audit, either alone or in conjunction with the matters referred to in pars (1), (3) or (4).
In relation to the matters in par (3) (which I qualified in my discussion of Issue (1)), in my view, the fact that the financial collapse of Travel and Wheels was being investigated by the CAC or their liquidator, or both, or that it was the subject of publicity and Ministerial concern, did not signify that there might be a claim by TCF against Phillips for compensation in respect of TCF's losses by reason of the 1987 audit. This is so, regardless of whether par (3) is considered on its own, or in conjunction with the matters in pars (1), (2) and (4).
The questions asked of Cullen during the s 541 examinations, referred to in par (4), did not amount to circumstances which might give rise to a claim against Phillips by reason of the 1987 audit. Paragraph (4) takes the questioning out of the overall context, which consisted of more than the bare facts of the questions asked. I refer to my discussion of the s 541 examinations in relation to Issue (2) in the context of the 1991 Chatswood proposal.
Issue (3) If the answer "no" to question 13 (b) (ii) was untrue, have TCF and PMS Gosford nonetheless established that Cullen, as the person signing the proposal form, gave that answer on the basis of a belief in fact held by him, being a belief that a reasonable person in the circumstances would have held?
There were no written submissions dealing with this issue, however, it was pleaded in par 6 of the further amended defence of the first, second, third and fourth cross respondents to the cross claim in NG 948 of 1992. If Cullen's answer "no" to question 13 (b) (ii) was untrue, in my opinion TCF and PMS have established that he gave that answer on the basis of his belief that the circumstances in question did not satisfy the description "circumstance[s] which may give rise to a claim". But was that belief of Cullen's "a belief that a reasonable person in the circumstances would have held"? The answer must be "no", because of the assumption that must be made, contrary to my conclusion expressed above in relation to Issue (2). Inherent in the assumption that the answer to question 13 (b) (ii) was untrue, is the conclusion that a reasonable person in Cullen's circumstances as at 22 April 1991 would have immediately recognised that those Part B matters of which Cullen was aware satisfied the description of "circumstance[s] which may give rise to a claim". Once it is appreciated that this is inherent in the making of the assumption, it follows that Issue (3) must be answered favourably to FAI.
Issue (4) If the answer "no" to question 13 (b) (ii) was untrue, has FAI established that Cullen, as the person who gave that answer, knew, or that a reasonable person in the circumstances could be expected to have known, that the answering of the question in that way would have been relevant to FAI's decision whether to accept the risk, and, if so, on what terms?
If, contrary to my conclusion, Cullen's answer to question 13 (b) (ii) was untrue, Cullen knew and a reasonable person in the circumstances could be expected to have known, that a statement that there were no circumstances known which might give rise to a claim under the policy would be relevant to FAI's decision whether to accept the risk and, if so, on what terms. Again, one need refer only to the fact that the question was asked in the proposal form and to the nature of the insurance sought, that is, a "claims made and notified" policy.
RENEWAL OF THE GOSFORD POLICY FOR 1991-1992 - ALLEGED NON-COMPLIANCE WITH THE DUTY OF DISCLOSURE - THE TCF FACTS
Issue (5) Were the matters described in pars 1-22 of Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding known to PMS Gosford as at 22 April 1991?
My discussion above under Issue (1) answers this question.
Issue (6) As to all or any of those matters in Part B of the Schedule to FAI's further amended defence in the TCF insurance proceeding which PMS Gosford knew, were they
(i) matters which PMS Gosford knew to be matters relevant to FAI's decision whether to accept the risk, and, if so, on what terms; or
(ii) matters which a reasonable person in the circumstances, could be expected to have known to be matters so relevant?
FAI pleads that Cullen failed to disclose to it, prior to entry into the Gosford policy, certain matters which were known to him, and which were matters that he knew to be relevant to FAI's decision whether to accept the risk, and, if so, on what terms, or matters that a reasonable person in the circumstances could be expected to know to be so relevant. The matters were those involved in FAI's case of misrepresentation (by Cullen, that is, that there might be a claim against Phillips by reason of the conduct of PMS in 1987 and 1988 in relation to Travel and TCF, and the matters in Part B of the Schedule). FAI submits that Cullen breached the duty of disclosure, apparently relying on the submissions which it advanced in relation to the issue of misrepresentation. FAI submitted that:
"... At the least, a reasonable person in the circumstances could be expected to know that circumstances making a claim possible, such as the matters in Part B of the Schedule, were relevant to FAI's renewal terms. This is obvious, and in any event question 13 made it clear." (par 88, FAI's submissions in chief - emphasis supplied)
In my view, Cullen did not fail to comply with the duty of disclosure. The duty did not require disclosure of a mere possibility of the making of a claim. The circumstances known to Cullen, and which FAI says Cullen should have disclosed, did not immediately suggest that a claim might as a real possibility be made against Phillips. Therefore, Cullen did not know that they were relevant to FAI's decision whether to accept the risk, and, if so, on what terms. Nor could a reasonable person in the circumstances be expected to have known the Part B matters and conduct of PMS in 1987 and 1988, known to Cullen, to be so relevant.
Conclusion on 1991 Gosford proposal
Cullen did not make a misrepresentation in his negative answer to question 13 (b) (ii) and the declaration of truth, in the proposal form dated 22 April 1991, or fail to comply with the duty of disclosure. Section 28 of the IC Act does not apply and so FAI is not entitled to avoid the Gosford insurance contract, and FAI's liability is not reduced as provided for in s 28 (3). FAI was not entitled to avoid the Gosford policy, its purported avoidance of it was ineffective; and the Gosford policy is enforceable in accordance with its terms. Exclusion (g) of the Gosford policy has no scope for operation.
ALLEGED BREACH OF IMPLIED PROVISION REQUIRING INSURED TO ACT TOWARDS FAI WITH UTMOST GOOD FAITH
FAI's case of failure to comply with the provision implied in all three contracts of insurance by s 13 of the IC Act, in so far as it required the insured to act towards FAI in respect of any matter arising under, or in relation to the contract, with the utmost good faith, must fail. The reason is that the case was founded upon FAI's case of misrepresentation and non-disclosure with respect to the matters known to the relevant insured and described in the relevant Schedule (to FAI's third further amended statement of claim or to FAI's further amended defence to TCF's amended points of claim, as the case may be). It suffices to say that I reject this part of FAI's case for the reasons that I gave earlier for rejecting its case of misrepresentation and breach of the duty of disclosure.
ATTACK ON McS's CREDIT
FAI made substantial submissions attacking McS's credit. In the course of these Reasons for Judgment I have rejected his evidence on some matters and accepted it on others. Notwithstanding a careful reading of FAI's submissions on the issue, I do not accept that McS is not a witness of truth, that he is disposed to tell the truth only when it coincides with his interests, or that his evidence is not to be accepted unless corroborated.
This is not to say that on particular matters his evidence was not affected by wishful thinking, rationalisation, reconstruction or the benefit of hindsight. But having considered his written evidence as well as his oral evidence over a lengthy cross-examination, I do not accept FAI's general submission that his credit is destroyed.
SUMMARY OF CONCLUSIONS
TCF should be refused leave under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and ordered to pay FAI's costs of the application for leave, that is to say, FAI's costs of the TCF insurance proceeding to the extent that they would not have been incurred but for TCF's participation.
The claim by McS and Phillips for indemnity by FAI in respect of the TAG judgment is a claim for indemnity in respect of a claim made against them for actual fraudulent acts and omissions of McS within Exclusion (b) of the PMS policy, but FAI does not seek a finding that Phillips condoned that fraudulent conduct of McS.
The claim by McS and Phillips for indemnity by FAI in respect of the TCF judgment is not a claim for indemnity of the kind just described.
FAI was not entitled to avoid any of the 1989-1990 PMS policy, the 1991-1992 Chatswood policy or the 1991-1992 Gosford policy under s 28 of the IC Act, and its liability in respect of the claims made against it for indemnity in respect of the TAG judgment and the TCF judgment is not reduced by the operation of that section on account of misrepresentation or failure to comply with the duty of disclosure. Accordingly, the three policies were and are enforceable in accordance with their terms. Exclusion (g) of the policies has no scope for operation.
FAI's claim for damages for breach of the implied provision requiring the insured to act towards FAI with the utmost good faith fails.
These conclusions render it unnecessary for me to address the further issues mentioned below.
(a) PMS advanced a case based upon a suggested "letter agreement of 24 January 1990" and FAI advanced a case in reply based on that agreement. By a letter of that date, TCM advised PMS that TCM acted for FAI and had been instructed by FAI to confirm indemnity and undertake the defence of the claim made against McS and Phillips in the TAG proceeding on certain conditions, including the following:
"2. That there has been no dishonest, fraudulent, criminal or malicious act or omission on the part of the partners or employees of your firm (see exclusion (b) of the Professional Indemnity Policy); ..."
There were other conditions stipulated in TCM's letter, including a condition that PMS "waive any Legal Professional privilege concerning any evidence of dishonest, fraudulent, criminal or malicious acts or omissions which may become known to [TCM] when acting as [PMS's] solicitors in connection with the subject matter of [the] claim". Another condition was that the partners of PMS execute and deliver to TCM a form of deed of waiver which was enclosed with TCM's letter. The letter also included this paragraph:
"Provided you agree to the above conditions FAI will indemnify your firm in connection with this claim under the policy on the understanding that such indemnity may be retrospectively withdrawn in the event that dishonest, fraudulent, criminal or malicious acts or omissions as referred to in Exclusion (b) of the Professional Indemnity Policy are found to exist."
On 16 February 1990, PMS returned the completed deed of waiver. By the deed, the partners executing it irrevocably authorised such solicitors as might be appointed by FAI to act in the defence or settlement of the TAG proceeding to provide full details to FAI of any alleged or actual dishonest, fraudulent, criminal or malicious acts or omissions of PMS or of any of PMS's partners or employees, of which such solicitors might, during their conduct of the defence or settlement, become aware. The deed also included this provision:
"2. The Insured acknowledges that such acts or omissions of the kind referred to in the last paragraph may entitle the Company to cancel the Policy." (emphasis supplied)
PMS submit that there was an agreement constituted by TCM's letter to PMS dated 24 January 1990 and PMS's letter in reply dated 16 February 1990 enclosing the executed deed. They submit that by the agreement so formed, FAI gave up any right which it might have to avoid the PMS policy for fraudulent misrepresentation or fraudulent non-disclosure.
In response, FAI submits that no such contract came into being and that the correspondence constituted a mechanism for confirming and implementing the PMS policy (a submission which, I think, has much force).
Since I have concluded that there was no misrepresentation or non-disclosure, it is strictly unnecessary for me to deal with PMS's submission. However, it seems appropriate to record my opinions: (a) that any agreement that may be found in TCM's letter of 24 January 1990 and PMS's reply of 16 February 1990 enclosing the executed deed of waiver of legal professional privilege, clearly did not have the effect of varying the dishonesty extension in the PMS policy; and (b) FAI did not give up the right to avoid for misrepresentation or non-disclosure.
(b) A further aspect of FAI's case with which I need not deal comprehensively is the TCM representation. It will be recalled that FAI submits that on or about 22 January 1990, McS represented orally to FAI through FAI's agent, Rainbow of TCM, that there had been no dishonest or fraudulent act or omission on the part of PMS, their partners or employees. The submission is that the TCM representation was false to the knowledge of McS by reason of the matters in Part A of the Schedule. Finally, this part of FAI's case includes the allegation that FAI undertook the defence of the TAG proceeding and incurred the cost of doing so in reliance on the TCM representation and suffered loss and damage equal to the cost of undertaking that defence.
Again, however, FAI does not, and in my view could not successfully, contend for the result that it is entitled to be relieved of its liability under the terms of the PMS policy, and, in particular, its liability under the dishonesty extension. If the supposed TCM representation had not been made, or if McS had disclosed his fraud which I have found established in Part II of these Reasons, FAI would have remained liable to indemnify Phillips as a non-condoning partner, subject to the terms of the PMS policy.
(c) I need not deal with FAI's claim to a restitutionary remedy in respect of the moneys which it outlaid in the defence of the TAG proceeding and settlement of the IPG claim, based on its supposed right to avoid the PMS policy for fraudulent non-disclosure and fraudulent misrepresentation, since I have concluded in this present Part (IV) of these Reasons, that FAI was not entitled to avoid the PMS policy.
(d) I need not deal with the issue raised by PMS as to the effect of s 33 of the IC Act.
(e) I need not deal with the issue whether, by waiver or affirmation, FAI lost any right of avoidance it had, because I have concluded that it never did become entitled to avoid any of the three contracts of insurance.
(f) I need not deal with the issue whether FAI breached the provision implied by s 13 of the IC Act, requiring FAI to act towards its insured with the utmost good faith, since I have concluded that in any event FAI is liable to indemnify in accordance with the terms of the respective policies.
(g) I need not deal with a submission that FAI is estopped from refusing to indemnify as a result of its having made certain representations, since I have concluded that FAI is liable to indemnify in accordance with the terms of the three policies in any event.
I propose not to make orders at this stage but to stand over the proceeding to a date convenient to the parties for that purpose, and to direct the parties to supply to my Associate, by a stipulated date, agreed short minutes of orders, including orders as to costs, and if agreement is not reached, the short minutes of the orders for which they will respectively contend and written outlines of their submissions in support.
CHRONOLOGY OF INSURANCE FACTS
22.05.89 McS signs proposal to renew PMS policy (2005185140) currently to expire on 23 May 1989, for the year 23 May 1989 - 23 May 1990. Attachment "C" to the proposal is a letter from PMS (McS) to FAI expressed to be written "for the sake of good order pursuant to condition 2 of the policy" notifying allegations by C E McDonald (Aust) Pty Ltd. (FAI's file on the McDonald claim is FAI NP/C 179/88)
23.05.89 M & M forward proposal to FAI.
20.06.89 FAI renews PMS policy (2005185140) FAI for the year 23 May 1989 - 23 May 1990 ($6,000,000 limit of indemnity any one claim, $5,000 excess per claim "dishonesty limit $500,000).
21.08.89 PMS notify FAI by letter of IPG claim against the Lemon brothers and PMS, annexing application and statement of claim NG 546/1989 (FAI's file on the IPG claim is FAI NP/0041/89).
17.01.90 PMS (through broker M & M) notify FAI of TAG claim made by letters dated 11 January from its solicitors, Rosenblums (FAI's file on the TAG claim is FAI NP/C116/89).
19.01.90 FAI (Kendrick) instructs TCM to investigate TAG claim and advise FAI as to indemnity.
22.01.90 Meeting between McS and Rainbow of TCM at which McS gives Rainbow an account of the facts relating to the TAG transaction; McS makes lengthy notes of the conference.
24.01.90 TCM (Rainbow) write to PMS enclosing "Deed of Waiver of Legal Professional Privilege" for execution.
29.01.90 TAG and TAGNT commence proceeding launched against McS and Phillips (NG 38/1990) ("the TAG proceeding") and TCM is instructed to conduct defence for them.
16.02.90 PMS return to TCM (Rainbow) executed "Deed of Waiver of Legal Professional Privilege".
20.03.90 McS writes to TCM lengthy letter supplying facts and files re TAG claim.
07.05.90 McS completes proposal form for renewal of the PMS policy for 1990-1991.
10.05.90 M & M write to FAI enclosing proposal of PMS and seeking quotation.
23.05.90 Renewal of PMS policy (2005185140).
23.07.90 PMS's Lismore practice is sold to Beale, Gaertner and Young.
27.07.90 PMS write to M & M advising Beale and Gaertner retired as partners of PMS on 30 June 1990 and that PMS sold Lismore practice to them and another from 23 July 1990; and that from 1 September 1990, PMS would be licensed to operate in association with Bird Cameron, would be covered by Bird Cameron's policy, and would require cover from FAI only to the extent of the Bird Cameron "excess" of $100,000.
31.07.90 M & M write to FAI enclosing copy of PMS's letter dated 27 July and "revised proposal form" dated 30 July 1990 signed by McS, and requesting quotation.
01.09.90 Cullen completes proposal for PMS Gosford practice of Phillips and Cullen ("Bird Cameron incorporating Phillips McSweeney - Gosford").
26.09.90 Letter from TCM to FAI reporting on progress of TAG proceeding.
28.09.90 McS completes proposal in respect of PMS Chatswood practice of McS and Turner ("Phillips McSweeney Partners").
15.10.90 Hinton of FAI instructs GDB who had been representing PMS on the claim for fees against, and the counter-claim for damages by, IPG, henceforth to represent FAI's interests also in the defence of IPG's claim against PMS for damages.
06.10.90 McS forwards that proposal form (dated 28 September 1990, for PMS Chatswood) to FAI.
16.10.90 IPG proceedings (NG 546/1989) settled by payment of $250,000 including costs by PMS to IPG (FAI paid $245,000 and PMS paid excess of $5,000).
24.10.90 M & M write to FAI noting that FAI agreeable to cancelling PMS policy and issuing two policies in its place.
29.10.90 M & M forward to FAI proposal for PMS Gosford dated 1 September 1990 and advising that "claims history" is the same as for "Phillips McSweeney".
08.11.90 FAI write to M & M confirming PMS policy cancelled with effect from 24 October 1990 and new policies to be issued for PMS Chatswood and PMS Gosford with effect from 24 October 1990 to 23 May 1991.
15.11.90 M & M write to PMSconfirming this.
Jan 91 FAI issues policy no 2030243080 for PMS Chatswood (for period 24.10.90-23.5.91).
FAI issues policy No 2030243160 for PMS Gosford (for period 24.10.90-23.5.91).
Each policy has a limit of $6,000,000 and an excess of $5,000 for each claim. The two policies are non-cumulative for claims arising out of work done before 24 October 1990. They replace the PMS policy which was cancelled with effect from 24 October 1990.
27.03.91 Letter from TCM to FAI advising that expert opinion obtained by TCM suggests PMS will be found liable, and seeking instructions to retain Arthur Anderson & Co as to damages.
22.04.91 Cullen completes proposal for renewal of PMS Gosford policy, currently due to expire on 23 May 1991. In answer to question 13 (a), Cullen states "Yes" and says "SEE ATTACHED LIST." He answers question 13 (b) "No". The attached list referred to inter alia, the McDonald, IPG and TAG claims.
28.04.91 McS completes proposal for renewal of PMS Chatswood policy, currently due to expire on 23 May 1991. In answer to question 13 (a), McS refers to the McDonald, IPG and TAG claims previously notified to FAI and two further claims not presently relevant. Attachment "C" was a "claims status information".
20.05.91 M & M forward to FAI the proposals for renewal of PMS Chatswood and PMS Gosford policies, and request quotations. Each memo referred to an enclosed sheet of claims which was that attached to the proposal.
26.05.91 FAI provides quotation to M & M.
05.06.91 M & M accept relevant quotation, and FAI renews Chatswood policy ($5,000,000 limit, $5,000 excess per claim "dishonesty limit" $500,000) for twelve months (23 May 1991 to 23 May 1992).
M & M accepts relevant quotation, and FAI renews Gosford policy ($6,000,000 limit for period 23 May 1991 to 1 July 1991, $100,000 limit for period 2 July 1991 to 23 May 1992, $5,000 excess per claim, "dishonesty limit" $500,000).
26.06.91 FAI (Kendrick) instructs TCM (Rainbow) to offer $150,000 to settle TAG litigation against PMS.
27.06.91 Letter from TCM to FAI advising TAG's claim is for $2,405,923.40 plus costs of $197,000 and that they are awaiting further expert advice on damages.
22.07.91-
22.10.91 Intermittent hearing of TAG proceeding before Olney J.
Sept 91 In answer to an inquiry by Kendrick, Rainbow tells him that he does not think McS had been dishonest.
09.10.91 FAI confirms renewal of the Gosford policy on the following terms (varied from those confirmed in June as a result of subsequent endorsement): $6,000,000 limit of indemnity any one claim for period 23 May 1991 to 1 August 1991, $100,000 limit from 1 August 1991 to 23 May 1992. The excess was to remain at $5,000, and the dishonesty limit was to remain $500,000.
04.12.91 TCF commences proceeding (NG 777/1991) against Dunn and others and McS and Phillips ("the TCF proceeding").
11.12.91 Application and statement of claim in the TCF proceeding are served on McS and Phillips. Claim for compensation, the subject of the TCF proceeding, was first made by TCF against McS and Phillips on or about this date.
13.12.91 McS notifies M & M by letter (enclosing letter for him addressed to FAI) of TCF proceeding, enclosing a copy of application NG 777/91 returnable on 19 December and accompanying statement of claim. McS's letter refers to PMS policy and PMS Chatswood policy but not to Gosford policy.
18.12.91 M & M notify FAI of TCF's claim made in the TCF proceeding under the Chatswood policy and refer FAI to the previous notification of the claim by IPG. M & M's memo to FAI enclosed copy of the letter dated 13 December from PMS to M & M.
19.12.91 FAI instruct TCM to offer $1,200,000 plus costs to settle TAG litigation against PMS.
28.01.92 GDM file notice of appearance on behalf of McS and Phillips in the TCF proceeding.
28.02.92 Olney J gives judgment on liability in the TAG proceeding.
06.03.92 By now, Kendrick has read Olney J's judgment and taken advice from TCM; FAI fax TCM (Rainbow) stating that FAI will not indemnify McS as Olney J's judgment has revealed that his conduct was dishonest and therefore is not covered under terms of the PMS policy, and that Phillips is to be indemnified to the extent of $500,000 only pursuant to "the dishonesty extension", and that FAI will not bear any further legal costs for McS.
06.03.92 FAI forwards to M & M proposal form for renewal of PMS Gosford Policy.
09.03.92 TCM write to PMS seeking to clarify TCM's position in relation to further representation of PMS.
14.04.92 TCM, on instructions from FAI, write to Rosenblums offering $157,000 in settlement of TAG's litigation against PMS.
24.04.92 Letter from TCM to McS and Phillips advising they will cease representing McS and Phillips by reason of conflict.
05.05.92 FAI writes to M & M reminding it that FAI is awaiting completed proposal for renewal of Gosford policy.
Cullen completes proposal for renewal of Gosford policy for 1992-1993.
TCM advise FAI, and FAI instructs TCM, that TCM should go off the record in the TAG proceeding.
12.05.92 McS completes proposal for renewal of Chatswood policy for 1992-1993.
12.05.92 FAI files summons S 50189/1992 in the Commercial Division of the Supreme Court of New South Wales against McS, Phillips, TAG and TAGNT seeking declarations that FAI not liable to indemnify McS and Phillips in respect of judgment in the TAG proceeding (NG 38/1990) and an injunction restraining TAG and TAGNT seeking leave to join or sue FAI under s 6 (4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ("the TAG insurance proceeding").
14.05.92 FAI write to M & M confirming that it will indemnify Phillips re TAG proceedings up to $500,000.
15.05.92 M & M forward to FAI completed proposal for renewal of Gosford policy and completed proposal for renewal of Chatswood policy.
18.05.92 M & M notify FAI under the Gosford Policy of the claim made by TCF in the TCF proceeding, against possibility that such a notification should be required as distinct from that given by M & M on 18 December 1991.
19.05.92 FAI write to M & M offering renewal of Gosford policy (limit of $100,000, excess of $5,000 per claim) but declining renewal of Chatswood policy.
21.05.92 After complaint by TAG and TAGNT, TCM cease representing FAI in the TAG insurance proceeding and CBP commence to represent FAI in their place.
22.05.92 The TAG insurance proceeding is transferred to the Federal Court of Australia, becoming NG 312/1992.
23.05.92 Effective date of renewal of Gosford policy. Chatswood policy lapsed, no renewal offered.
26.05.92 FAI writes to M & M seeking instructions regarding renewal terms offered by FAI for Gosford policy.
11.06.92 FAI write to M & M purporting to avoid PMS policy (2005185140) for periods 23 May 1988 to 24 October 1990 and Chatswood policy (2030243080) for periods 24 October 1990 to 23 May 1992.
20.08.92 In TAG proceeding Olney J quantifies damages against McS and Phillips at $4,026,915.80 and orders that they pay costs.
10.09.92 Hearing of TCF proceeding commences before Wilcox J.
02.12.90 Wilcox gives judgment for TCF against, relevantly, McS and Phillips, in the TCF proceeding for $626,586 plus costs.
23.12.92 TCF commences proceeding NG 948/1992 against FAI under s 6 Law Reform (Miscellaneous Provisions) Act 1946 ("the TCF insurance proceeding").
08.02.93 Wilcox J orders that the TAG insurance proceeding and the TCF insurance proceeding be heard together.
24.08.93 FAI purports to avoid Gosford policy (2030243160) for period 23 May 1991 to 23 May 1992.
17.12.93 Wilcox J directs parties to TAG insurance proceeding and to TCF insurance proceeding to identify those findings of fact of Olney J in TAG judgment and of Wilcox J in TCF judgment which they contest and the findings which they contend should be made instead.
15.07.94 Deed between TAG and TAGNT and FAI settling the TAG proceeding by FAI's paying the sum of $2,900,000.
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