Manufacturers' Mutual Insurance Limited v John H Boardman Insurance Brokers Pty Ltd

[1994] HCA 16

HIGH COURT OF AUSTRALIA

MASON CJ, DEANE, TOOHEY, GAUDRON AND McHUGH JJ

MANUFACTURERS' MUTUAL INSURANCE LIMITED v JOHN H. BOARDMAN INSURANCE BROKERS PTY. LTD. AND ANOTHER

(1994) 179 CLR 650

13 April 1994

Insurance

Insurance—Renewal—Offer by insurer to renew insurance—Payment of premium to insured's broker—Whether acceptance of offer Insurance (Agents and Brokers) Act 1984 (Cth), s. 14(1), (2).

Orders

Appeal allowed with costs.

Set aside the orders of the Court of Appeal of New South Wales and in lieu thereof order:
(a) appeal to that Court allowed with costs; (b) set aside the order of Rogers CJ Comm D and in lieu thereof

order that the question to be determined by his Honour be answered as follows: Question In the circumstances stated in paragraphs 1 to 8 of the Summons under the heading Nature of Dispute and by virtue of the provisions of s. 14 of the Insurance (Agents and Brokers) Act 1984 (Cth), did the payment by the plaintiff to the second defendant on or about 22 May 1989 effect a renewal of policy of insurance No. 21-5003639-CPI? Answer No.

Mason CJ, Toohey and McHugh JJ noted, at p(1) of their judgment that:
"(T)he majority (of the Court of Appeal) decided the case
on the basis of an issue not argued before (that) Court". This statement is based on a concession made by the respondent at the outset of the High Court proceedings, a concession which was made in relation to the submissions of the appellant.

Although not directly raised by the parties at the Court of Appeal, the issue was argued before that Court in the course of answering questions from Mahoney JA.

Decisions

MASON CJ, TOOHEY AND McHUGH JJ This is an appeal from a decision of the New South Wales Court of Appeal (Mahoney and Cripps JJA, Clarke JA dissenting) dismissing an appeal from a decision of Rogers CJ Comm D in favour of the second respondent ("the Company") which was the plaintiff in the action. The appeal to this Court was initially brought on the ground that the decision of the Court of Appeal should be set aside for procedural unfairness, as the majority of that Court decided the case on the basis of an issue not argued before the Court of Appeal. This was accepted by the first respondent ("the Broker"), and it was agreed that the decision of the Court of Appeal should prima facie be set aside on that ground.

2. The appeal then proceeded before this Court on the basis that this Court would consider two issues of law raised by the case: first, the operation of s.14(2) of the Insurance (Agents and Brokers) Act 1984 (Cth) ("the Act"); and second, whether, in the circumstances of this case, acceptance of an offer of renewal of an insurance contract could be effected by the insured paying the insurance premium to an insurance broker without any notification to the insurer.

Factual background

3. The Company owned premises in Newcastle which it desired to insure. In June 1987, the Company entered into an agreement with the Broker, an insurance broker, for the Broker to procure fire and liability insurance for the premises on behalf of the Company. The Broker duly procured such insurance on behalf of the Company from the appellant ("the Insurer"), an insurance company. The insurance policy provided cover for the premises from 28 June 1987 to 27 May 1988 ("the original policy"). Before the expiry of the original policy, the Insurer sent to the Broker a renewal notice for the insurance policy. The Company, through the Broker, accepted the offer of renewal of the policy and the policy was renewed for the period 27 May 1988 to 27 May 1989. Before the expiry of the renewed policy, the Insurer again sent to the Broker a renewal notice for the policy. On or about 22 May 1989, the Company instructed the Broker to arrange for the renewal of the policy and forwarded to the Broker a cheque in the sum of $2,892.35. This sum, it appears, consisted of a premium of $2,692.35 and a commission to the Broker of $200. The cheque was presented for payment by the Broker on or about 24 May 1989 and paid. It appears that there remains a factual dispute as to whether the Broker either communicated the Company's decision to renew the policy to the Insurer or forwarded a cheque in payment of the premium. For the purposes of this appeal, it must be assumed that neither of these events occurred.

4. On 28 December 1989, the insured premises were damaged as the result of an earthquake. The Company made a claim on the Insurer in relation to the damage but the Insurer rejected the claim on the basis that the insurance policy had lapsed on 27 May 1989, following the failure of the Broker or the Company to provide to the Insurer renewal instructions or to make any payment for the premium. The Company then commenced proceedings in the Supreme Court of New South Wales against both the Insurer and the Broker. It appears that the parties agreed that one or other of the Insurer or the Broker is liable to indemnify the Company. Accordingly, in effect, the question in this case is which of those parties should bear the burden of that liability.

5. The parties also agreed that the notice of renewal sent by the Insurer operated as an offer to renew, rather than an invitation to treat, so that, upon acceptance of the offer by the Company, a contract of insurance came into existence between the Insurer and the Company. In the Supreme Court before Rogers CJ Comm.D., the parties agreed that there should be determined, as a separate question before trial, the following question:

"In the circumstances stated in paragraphs 1 to 8 of the Summons, under the heading Nature of Dispute, and by virtue of the provisions of s.14 of the Insurance (Agents and Brokers) Act 1984, did the payment of the renewal premium by the (Company) to (the Broker) on or about 22 May 1989, effect a renewal of policy of insurance No.21-5003639-CPI?"

At first instance

6. At first instance, Rogers CJ Comm.D. answered that question in
the affirmative. His Honour stated that:

"all the considerations which moved the Law Reform Commission to suggest a change in the law with respect to the receipt of moneys by brokers dictate an interpretation of the Act which equates in all respects, including the making of the contract, payment to the broker with payment to the insurer direct. Were it otherwise the work of the Act would be but half done. If this requires a strained construction to be given to the section, so be it".

The Court of Appeal

7. All the members of the Court of Appeal concluded that s.14 of the Act did not operate so as to result in the payment of the premium by the Company to the Broker effecting a renewal of the insurance contract between the Company and the Insurer. Accordingly, the Court of Appeal rejected the basis on which Rogers CJ Comm.D. had decided the question in favour of the Company. However, the Court of Appeal went on to consider whether, in the circumstances of the case, "the terms of the offer of renewal were capable of acceptance by payment of the premium to (the Broker)". This question did not arise in the appeal, which was confined to the particular question formulated before Rogers CJ Comm.D. Nonetheless, a majority of the Court of Appeal held that, in the circumstances, the Company could properly conclude that the Insurer contemplated that the Company would pay the premium to the Broker and would understand that the act of acceptance was intended to be payment of the premium to the Broker.

Acceptance of the offer

8. It is convenient to deal first with the question whether the offer of renewal made by the Insurer was capable of acceptance by payment of the premium by the Company to the Broker, without communication or payment to the Insurer. As a general rule, at common law an insurance broker is not the agent of the insurer, but of the insured ((1) Con-Stan Industries of Australia Pty. Ltd. v. Norwich Winterthur Insurance (Australia) Ltd. (1986) 160 CLR 226 at 234. See also Anglo-African Merchants Ltd. v. Bayley (1970) 1 QB 311 at 322-324. It was agreed by the parties that the first respondent was a general insurance broker and therefore s.12 of the Act did not apply. Section 12 provides that an insurance intermediary, with the exception of, inter alia, a general insurance broker, shall be deemed to be the agent of the insurer and not of the insured or intending insured.). The position may be different where there is an express agency arrangement between insurer and broker, for
example a "binder" ((2) See s.9 of the Act. A "binder" is an arrangement under which a broker is authorized by an insurer to grant final cover and, in many cases, to settle claims in certain types of business, subject to specified limits.), in existence. However, it was accepted by the parties that there was no such arrangement in this case and that the Broker was not the agent of the Insurer under the general law. Therefore, at common law the payment of the premium to the Broker would not constitute acceptance of the offer of renewal unless there can be found in the offer some manifestation of intention that acceptance could be effected by payment of the premium to the broker.

9. The renewal documents were sent by the Insurer to the Broker as agent for the Company. It is not clear whether the documents were sent by the Broker to the Company. Presumably it was intended that they would be sent on because the renewal notice invited acceptance by the insured. The documents were confusing, to say the least of them.

10. The renewal notice begins with the heading "RENEWAL ADVICE FIRST AND FINAL NOTICE" (our emphasis). Under that heading there appears the statement "... IF YOU REQUIRE COVER TO CONTINUE PLEASE FORWARD RENEWAL INSTRUCTIONS BEFORE THAT DATE" (again emphasis added). Under the heading "Postal Address" the name of the Broker and its address is stated prominently. The notice named the Company as the "Insured" and the Broker as the "Intermediary". It gave details of the policy to be renewed. It contained the statement:

"BEFORE RENEWING PLEASE READ THE DUTY OF DISCLOSURE NOTICE, THE POLICY WORDING AND ANY NOTICES ATTACHED."

It set forth the gross premium and the total premium sum $2,692.35. It gave as the address of the Insurer:

"MMI General Insurance Limited, 56 York Street, Sydney NSW 2000 TELEPHONE [phone]".

The renewal notice also contained a detachable form:

"RENEWAL PAYMENT ADVICE ... PLEASE DETACH THIS SECTION AND FORWARD IT WITH YOUR PAYMENT TO: MMI GENERAL INSURANCE LIMITED G.PO. Box 4049, Sydney NSW".

11. Also forwarded by the Insurer to the Broker with the renewal documents was a printed document containing "Important Notes". It provided:

"RENEWAL NOTICES The renewal notice is issued subject to the terms and conditions of the policy. If you require an alteration to the policy, please advise the changes required to one of the company's offices."

12. In the original policy, the terms of which have been taken to be included in the renewed policy mutatis mutandis, there appeared under the heading "Common Policy Section" the following:

"Subject to You having made or making to Us a written proposal and declaration the particulars of which are deemed to be furnished by you and relied upon by us And our acceptance of such proposal (indicated by our issue of a Policy Schedule) And Also Subject to your payment to us of the premium specified on your Policy Schedule we will in accordance with the terms and conditions of this Policy indemnify you in respect of the happening of the contingencies or events specified in such Sections as will apply to the Policy as indicated on your Policy Schedule."

13. Under the general law, the renewal of a contract of insurance that is only renewable by mutual consent, and not by right, results in a fresh contract separate from the pre-existing contract of insurance ((3) C.E. Heath Underwriting and Insurance (Aust.) Pty. Ltd. v. Edwards Dunlop and Co. Ltd. (1993) 176 CLR 535 at 545-546. See also Ivamy, General Principles of Insurance Law, (1986) at 247-250.). The question is whether such a fresh contract was made by the parties. In the present case, the Insurer, by sending the renewal documents to the Broker as agent for the Company, made an offer to enter a fresh contract of insurance on the terms set out in or incorporated by those documents. That offer was capable of acceptance in the manner provided in the documents. The arguments of the parties proceeded on the footing that payment of the premium was a mode of acceptance provided for in the documents. That this is so emerges very clearly from the materials, in particular the "Renewal Payment Advice" and the provision in the original policy under the heading "Common Policy Section".

14. It is at this point that the arguments diverge. The Company submits that the documents contemplate payment to the Broker as a mode of acceptance. The Insurer argues that the only payment contemplated
as an acceptance is payment to it. The documents certainly contemplate payment as a mode of acceptance. Payment of the premium might be made not only by cheque addressed to the Insurer at its post office box number but also by payment in cash or by cheque to the Insurer at its office in York Street, Sydney or, perhaps, elsewhere. Payment to the Insurer by either the Company or the Broker acting on behalf of the Company would have constituted a sufficient acceptance of the offer of renewal.

15. It appears from the documents that the offer of renewal was capable also of acceptance by mere communication to the Insurer of acceptance unaccompanied by payment of the premium. The first
heading in the renewal notice and the reference below it to "RENEWAL INSTRUCTIONS" (our emphasis) plainly contemplate that a communication of intention to renew will constitute an acceptance.

16. However, we do not accept the Company's argument that the documents contemplated that a payment of the premium to the Broker, without communication to the Insurer, was a sufficient acceptance of the offer to renew. The features of the documents to which we have already referred tell strongly against that reading of them. Further, the consequences of such a result also tell against that reading of the documents.

17. If the contract were held to be concluded without communication of acceptance to the Insurer, the Insurer would be "on the risk" for some length of time without being aware of that fact. Not only is that a result unlikely to have been intended by the parties, but it also gives rise to certain anomalies. For example, the Insurer would be precluded from informing its reinsurers of the risk; it would be precluded from being able properly to assess its level of exposure to various kinds of risk so as to conduct its business appropriately; it would have a receivable by way of premium owing to it which it would be precluded from bringing to account. More importantly, perhaps, it would be precluded from monitoring the particular insurance arrangement in question through inspection or otherwise; and it would be precluded from exercising any right to cancel the policy that might arise under s.60 of the Insurance Contracts Act 1984 (Cth). These consequences might seem to be of little significance in a case such as the present where a small premium only is involved. However, the consequences would be much more serious in the case of a large premium or in cases where the insurer is on the risk for several policies without knowledge.

18. It may be the practice of insurers and brokers for a broker to retain the premium for some extended period, rather than paying the premium immediately to the insurer, and it may be that the Company knew of this practice. However, the practice was neither established by evidence nor admitted. In any event, these facts, if they be
facts, do not, it seems to us, require a conclusion that no communication of renewal to the Insurer was required. The documents did not contemplate that the policy could be renewed by payment of the premium to the Broker without notification to the Insurer of the renewal before the expiry of the original policy.

19. As it is to be assumed that payment of the premium to the Insurer never occurred and that the Insurer was never informed of the Company's acceptance, no contract of insurance came into being for the period of 27 May 1989 to 27 May 1990 by virtue of the common law. This conclusion is supported by the decision of this Court in Con-Stan Industries of Australia Pty. Ltd. v. Norwich Winterthur Insurance (Australia) Ltd. ((4) (1986) 160 CLR 226.), where the Court held that payment of the premium by an insured to a broker did not discharge, at common law, the liability of the insured to pay the premium to the insurer.

Section 14 of the Act

20. It remains to be considered whether the operation of s.14(2) of the Act alters the common law position in relation to the making of an insurance contract. Section 14(2) of the Act provides as follows:

"Payment to an insurance intermediary by or on behalf of an intending insured of moneys in respect of a contract of insurance to be arranged or effected by the intermediary, whether the payment is in respect of a premium or otherwise, is a discharge, as between the insured and the insurer, of any liability of the insured under or in respect of the contract, to the extent of the amount of the payment."

21. As mentioned earlier, the renewal of a contract of insurance renewable by mutual consent results in a fresh contract, rather than an extension of an existing contract. Thus, when moneys are paid to a broker in respect of a renewal of a contract of insurance to be effected by the broker, such payment will fall within the operation of s.14(2). It is accepted in this case that the Broker was an insurance intermediary as defined in s.9 of the Act. Accordingly, the question is: how does s.14(2) operate in the circumstances of this case?

22. The answer, in our view, is to be found in the words of the sub-section. The first part of s.14(2) is uncontroversial; it clearly contemplates the situation where a person, wishing to arrange insurance (or effect a renewal) through a broker, pays a sum to cover the premium to the broker before the insurance has been arranged (or the renewal effected). That was the situation here. Once such a payment has been made, that sum is, by virtue of the second part of the sub-section, to operate as a discharge of any liability of the insured "under or in respect of the contract" (emphasis added); that is, the sub-section contemplates that the contract (or renewal) has been effected. However, until the contract is effected, there can be no liability, so s.14(2) can have no operation until there is a contract in existence ((5) See Sutton, Insurance Law in Australia, 2nd ed. (1991) at 328. See also International Specialist Underwriters Ltd. v. Heiman (1987) 9 NSWLR 201 at 203-204.). In our view, the words of s.14(2) are not wide enough to achieve the further result of bringing into existence the contract of renewal as well as discharging the liability for the payment of the premium. In this respect, we are in agreement with the decision of the Court of Appeal.

23. The consequences for an insurer, mentioned earlier, if it is found to be on the risk without knowledge of renewal make it unlikely that the legislature intended that s.14(2) should have the wide-ranging operation contended for by the Broker. What is more, that operation can only be achieved by a strained reading of its language.

24. This approach to the construction of the sub-section is supported by its history. According to the explanatory memorandum to the Act, the Insurance (Agents and Brokers) Act was "largely based" on recommendations made by the Australian Law Reform Commission in its report Insurance Agents and Brokers ((6) Australian Law Reform Commission, Report No.16, (1980).). That report was concerned, inter alia, with the degree of responsibility insurers should bear for the conduct of brokers. In particular, the report was concerned with the practice, common in the insurance industry, whereby the broker, by arrangement with the insurer, kept moneys paid to it by insured persons for a considerable period. This practice left the insured with the risk of the broker becoming insolvent. The Commission recommended that the general responsibility of an insurer for a broker should be left to the common law ((7) ibid. at xiv, 31.), with two exceptions: an insurer should be responsible for a broker's conduct, first, where the broker was acting under a binder and, second, in relation to the receipt of premiums by a broker from an insured for transmission to the insurer ((8) ibid. at xv, 31.). So, in its Summary of Report, the Commission stated that ((9) ibid. at xv.):

"In one important respect, the Commission does recommend that the insurer should be responsible for the conduct of brokers. When a contract of insurance has been arranged by a broker, the premium is paid to him for transmission to the insurer. The broker is, in a sense, the agent of both insured and insurer in this regard. Insurers do not at present always insist upon immediate transmission of premiums by brokers. Many of them allow considerable periods of credit to brokers, who commonly invest premium funds for their own benefit. While some aspects of this practice may be reasonable as between insurer and broker, there is a danger that premiums held by a broker on credit from insurers may disappear in the event of that broker's insolvency. The insured should not be prejudiced by arrangements of this type. Consequently, the Commission recommends that payment to a broker of a premium should operate as a discharge of the insured's debt to the insurer."

The Commission proposed a draft clause equivalent to s.14(1) ((10) ibid. at 103.). However, it did not propose a clause equivalent to s.14(2). It is clear from the Commission's Report that it was concerned with discharge of liability to pay a premium under a contract in existence; it was not concerned to extend agency principles to brokers; nor was it concerned to recommend that a payment of premium to a broker should be sufficient in itself to effect the conclusion of a contract between insurer and insured.

25. In the drafting of the Act, s.14(2) was added. The explanatory
memorandum stated that:

"sub-clauses 14(1) and (2) provide that an insurer is responsible for moneys payable to the insurer which are received from an insured, or intending insured, by an insurance intermediary".

While not conclusive, this description supports the proposition that a contract must be in existence, or come into existence, in order for sub-ss.(1) and (2) of s.14 to operate. That a contract is not brought into existence by payment is supported by the use of the word "payable", indicating an already existing liability to pay that is to be discharged. Further, there is nothing to indicate an intention to depart from the explicit statement in the explanatory memorandum that the legislation was largely based on the recommendations of the Law Reform Commission.

26. It was suggested that, if s.14(2) is construed in the way in which we would construe it, it adds nothing to s.14(1), which alone achieves the result achieved by a narrow reading of s.14(2). Section 14(1) provides, in very similar terms to s.14(2), as follows:

"Where a contract of insurance is arranged or effected by an insurance intermediary, payment to the insurance intermediary of moneys payable by the insured to the insurer under or in relation to the contract, whether in respect of a premium or otherwise, is a discharge, as between the insured and the insurer, of the liability of the insured to the insurer in respect of those moneys."

27. It was argued that this provision, in the absence of s.14(2),
would result in a payment to an intermediary made before the conclusion of the insurance contract being effective to discharge the liability of the insured. We agree. Therefore, it is argued, s.14(2) must be given a wider meaning, or it has no role to play; it is superfluous. With this argument we do not agree. In our view, s.14(2) was probably included as a result of "excessive caution" ((11) See Inland Revenue Commissioners v. Dowdall, O'Mahoney and Co. Ltd. (1952) AC 401 at 415 per Lord Reid.). It is worded very similarly to s.14(1), indicating to us that it was meant to have essentially the same operation as that sub-section, but in the slightly different circumstances where payment is made before the contract is concluded. This is supported by the absence of any reference to an "intending insured" in s.14(1); it speaks only of an "insured", indicating that a contract is already in existence.

28. Other provisions of the Act support this construction of sub-ss.(1) and (2) of s.14. Section 11 makes an insurer generally responsible for the conduct of the insurer's agents on which a person in the insured's position could reasonably be expected to rely and on which the insured did rely. An "insurance intermediary", which includes a broker ((12) s.9.), is deemed to be the agent of the insurer ((13) s.12(1).) but this provision does not apply to a general insurance broker ((14) s.12(2). There is an exception to this in s.15, which deems an agency relationship between insurer and an insurance intermediary (including a broker) where the insurance intermediary acted under a binder in relation to a particular contract.). Thus, the scheme of the Act is to leave the relationship between broker and insurer to be determined by reference to the common law except in two situations: first, where a binder is in existence and, second, in relation to the receipt of moneys for premiums. This follows the approach recommended by the Law Reform Commission in its report, discussed above, and supports the conclusion that payment of moneys to a broker before any contract is arranged will not bring a contract between the insurer and insured into existence.

29. In our view, therefore, s.14(2) can only operate to make the payment of the premium to the first respondent the discharge of a liability under a contract effected as contemplated by the offer of renewal. It does not operate to make the payment the acceptance of the offer and the simultaneous discharge of the liability under the contract then formed.

30. In the result, we would allow the appeal from the decision of the Court of Appeal, set aside the orders made by that Court, allow the appeal to that Court, set aside the order made by Rogers CJ Comm D
and answer the question in the negative.

DEANE AND GAUDRON JJ The background to this appeal and the facts involved in it are set out in the joint judgment of Mason CJ, Toohey and McHugh JJ in this Court and in the judgment of Mahoney JA ((15) See (1992) 27 NSWLR 630 at 631-634.) in the Court of Appeal. It is unnecessary that we repeat them.

2. It is common ground that, in all the circumstances of the case, the offer of the insurer ("MMI") to renew the policy could be accepted by payment to MMI, by either the insured ("Metrot") or its broker ("Boardman"), of the premium due on renewal of the policy. In other words, it is common ground that, if the payment of the premium due on renewal which Metrot in fact made to Boardman had been made direct to MMI, the policy would have been duly renewed. The primary question on the appeal is whether the effect of s.14(2) of the Insurance (Agents and Brokers) Act 1984 (Cth) ("the Act") is that the payment by Metrot to Boardman of the renewal premium is, for relevant purposes, to be treated as a payment made to MMI with the consequence that the policy was duly renewed. The secondary question arises in the event of a negative answer to the primary question. It is whether, in all the circumstances of the case (including the context provided by the existence of the provisions of s.14(2)), MMI's offer to "renew" the policy was susceptible of being accepted in accordance with its terms by payment of the premium to Boardman. It can be said at once that, like the learned trial judge, we consider that the first of those questions should be answered in the affirmative. Accordingly, it will
be unnecessary for us to address the second of them. Section 14 of the Act reads as follows:

"(1) Where a contract of insurance is arranged

or effected by an insurance intermediary, payment to the insurance intermediary of moneys payable by the insured to the insurer under or in relation to the contract, whether in respect of a premium or otherwise, is a discharge, as between the insured and the insurer, of the liability of the insured to the insurer in respect of those moneys. (2) Payment to an insurance intermediary by or

on behalf of an intending insured of moneys in respect of a contract of insurance to be arranged or effected by the intermediary, whether the payment is in respect of a premium or otherwise, is a discharge, as between the insured and the insurer, of any liability of the insured under or in respect of the contract, to the extent of the amount of the payment. (3) Payment by an insurer to an insurance

intermediary of moneys payable to an insured, whether in respect of a claim, return of premiums or otherwise, under or in relation to a contract of insurance, does not discharge any liability of the insurer to the insured in respect of those moneys. (4) An agreement, in so far as it purports to

alter or restrict the operation of subsection (1), (2) or (3), is void. (5) Subsection (4) does not render void an

agreement between an insurance intermediary and an insured in so far as the agreement allows the insurance intermediary to set off against moneys payable to the insured moneys payable by the insured to the insurance intermediary in respect of premiums."

Section 9 of the Act defines an "insurance intermediary" as meaning:

"a person who: (a) for reward; and (b) as an agent for one or more insurers or as an agent for intending insureds;

arranges contracts of insurance in Australia or elsewhere, and includes an insurance broker".

It is common ground that Boardman was "an insurance intermediary" for the purposes of s.14.

3. The Act was largely based upon the draft Bill annexed (as Appendix A) to the 1980 Report of the Australian Law Reform Commission
on Insurance Agents and Brokers ((16) Australian Law Reform Commission, Report No.16.) ("the 1980 Report"). Subject to very minor variations ((17) The insertion of "or effected" in s.14(1) and the substitution of ",(2) or (3)" for "or (2)" in s.14(4).), sub-ss.(1), (3), (4) and (5) of s.14 respectively reproduce sub-ss.(1), (2), (3) and (4) of s.13 of the draft Bill. Sub-section (2) of s.14 had no predecessor in the draft Bill. Its express operation is to bring within s.14 the case where an "intending insured" under a contract of insurance "to be arranged or effected" (emphasis added) makes a relevant payment to the insurance intermediary. Clearly enough, sub-s.(2) was intended to ensure that the protection which the Act extends to an insured in respect of payments made to an insurance intermediary covers a payment made by an "intending insured" of the amount of the premium for "a contract of insurance" which is "to be", but has not yet been, "arranged or effected by the (insurance) intermediary".

4. The mischief at which s.14(1) was directed was identified by the Law Reform Commission in its 1980 Report. It was that, in a context where insurers did not always insist upon minimum transmission of premiums by brokers, there was a danger that, if a broker became insolvent, premiums held during the period allowed by the insurer would be lost to the prejudice of the insured whose agent the broker was. As the Commission said ((18) 1980 Report, Summary at xv.):

"In one important respect, the Commission does recommend that the insurer should be responsible for the conduct of brokers. When a contract of insurance has been arranged by a broker, the premium is paid to him for transmission to the insurer. The broker is, in a sense, the agent of both insured and insurer in this regard. Insurers do not at present always insist upon immediate transmission of premiums by brokers. Many of them allow considerable periods of credit to brokers, who commonly invest premium funds for their own benefit. While some aspects of this practice may be reasonable as between insurer and broker, there is a danger that premiums held by a broker on credit from insurers may disappear in the event of that broker's insolvency. The insured should not be prejudiced by arrangements of this type." (emphasis added)

The use of the phrase "on credit from insurers" in the above paragraph would seem inappropriate since, if a broker were allowed by an insurer to retain a premium paid by an insured "on credit from" the insurer without the authority or knowledge of the insured, the prima facie position would be that the premium had been applied by the broker as agent of the insurer by way of loan to the broker with the consequence that the premium had, for relevant purposes, been received by the insurer. Indeed, as we followed the argument in the present case, it was ultimately common ground that Boardman was not only allowed by MMI to hold premiums which it received for a period before paying them on to MMI but was permitted to appropriate part of the premiums received in payment to itself of an amount over and above any fee openly demanded from its client. Those matters were not, however, the subject of evidence in the courts below and no submission has been made in this Court to the effect that, even if the amount of the premium was initially received by Boardman as agent for Metrot, it was subsequently applied by Boardman as agent for MMI with the consequence that it was in fact received by MMI. Be that as it may, it is apparent that the legislative intent underlying s.14(1) was that, in the words of the Commission, the "insured should not be prejudiced" by the insolvency of an insurance intermediary who has received from an insured but not passed on to the insurer payment of moneys payable under or in relation to the contract of insurance.

5. The close correspondence between the words of s.14(2) and the words of s.14(1) makes plain that the legislative intent underlying s.14(2) was to extend the protection which s.14(1) extended to payments made to an insurance intermediary by an actual insured to payments made to an insurance intermediary by an intending insured in respect of a prospective contract of insurance. The mere fact that an intending insured makes a payment of an amount to an insurance broker on account of the premium for some desired cover will not, of itself, suffice to bring the provisions of s.14(2) of the Act into operation. The reason why that is so is that the primary operation of the sub-section is to effect "a discharge, as between the insured and the insurer, of any liability of the insured under or in respect of the contract, to the extent of the amount of the payment". An amount on account of premium could be paid to an insurance broker before the terms of any contract of insurance have been settled or, for that matter, even before the identity of the prospective insurer has been ascertained. In such a case, s.14(2) could not operate at that stage. For the sub-section to operate, it must be possible to identify some proposed contract of insurance with a specific insurer in respect of which the broker is acting as an "insurance intermediary" in the sense of arranging ("arranges" ((19) See s.9 definition of "insurance intermediary".) ) that particular contract of insurance. It is only in the context of such a relationship between intending insured, prospective insurer and insurance intermediary that the stage is reached where it is possible to identify the liability of the insured to the insurer in respect of the contract of insurance upon which the sub-section is to operate.

6. When one comes to apply s.14(2) to the circumstances of the present case, it is clear that the opening requirements of the sub-section are satisfied. There was a payment to an insurance intermediary (Boardman) by an intending insured (Metrot) of moneys in respect of a contract of insurance to be arranged or effected by the intermediary. There is no difficulty in identifying the relevant contract of insurance. It was the policy with MMI in respect of which MMI expressly solicited "RENEWAL INSTRUCTIONS". It follows that s.14(2) expressly provided that, to the extent of the amount of the payment, Metrot's payment of the premium to Boardman operated as a discharge, as between Metrot and MMI, "of any liability of (Metrot) under or in respect of (that) contract". As has been seen, s.14(2) is, in terms, directed to payment by "an intending insured of moneys in respect of a contract to be arranged or effected" (emphasis added). In that context, the natural construction of the sub-section is to read the words "liability ... under or in respect of the contract" (emphasis again added) as encompassing, in a case such as the present, the intending insured's prospective liability under that proposed contract. The critical question for the purposes of the present case is whether s.14(2) is to be narrowly construed so that it does no more than effect a technical "discharge" of that prospective "liability" if and when it actually comes into existence or whether it should be construed as having the more general effect of deeming the payment of the premium or other amount to the intermediary to be, for the purposes of the prospective contract of insurance, a payment by the prospective insured to the insurer. In our view, the sub-section should be given that more general effect.

7. The words "is a discharge, as between the insured and the insurer, of ... liability of the insured" appear in both sub-s.(1) and sub-s.(2) of s.14. Their meaning clearly corresponds in each sub-section. If the words did no more than bring about a technical "discharge" of liability without effecting a statutory deeming that the "discharge" had been effected by payment to the insurer, each sub-section would constitute a trap for the very persons for whose protection it was enacted. If, for example, an insurance policy contained a requirement of payment of the premium in cash to the
insurer personally as a condition precedent of the insurer's liability, the consequence of such a narrow and technical construction of the relevant words would be that the condition precedent was not fulfilled notwithstanding that there was a "discharge" under s.14(1) or s.14(2) of any liability to make the payment. Again, in a case where a contract of insurance was rescinded by an insured for fundamental breach and the consideration moving from the insurer failed completely, the result of that narrow construction would be that the legislative intent manifest in s.14(1) and s.14(2) would be confounded: an insured who had paid or prepaid the premium to an insolvent insurance intermediary could not recover it from the insurer as money had and received by the insurer. Similarly, in a case such as the present where the insolvent insurance intermediary failed to pass on the prepayment of the premium, the effect of such a narrow construction of s.14(2) would be that, if the offer of renewal could only be accepted by prepayment of the premium to the insurer, the renewal could only be effected by payment of a premium in respect of which the insured's liability was, as between the insured and the insurer, expressly discharged by s.14(2). Yet again, if the operation of s.14(1) and s.14(2) were confined to effecting a technical "discharge" of "liability" without producing a statutory deeming that the premium had been actually paid, the insured would be deprived of the protection of other statutory provisions, such as s.39 of the Insurance Contracts Act 1984 (Cth) whose protection can be lost if an instalment of premium "has remained unpaid" for at least 14 days.

8. It is true that that construction of s.14(2) may give rise to problems for an insurer. Such problems are, however, confined by the fact that the deemed payment to the insurer is only for the purpose of an identifiable prospective contract of insurance. They can, no doubt, be minimized by the insurer regulating its own conduct to ensure that a situation in which a contract of insurance can be concluded by payment of the premium only arises in circumstances where the insurance intermediary involved in arranging the prospective contract is reliable and trustworthy. However, even if the problems from the insurer's point of view cannot be completely eliminated, they cannot negate the legislative intent which is otherwise to be discerned in both s.14(2) and s.14(1).

9. It follows that, in our view, s.14(2) operated in the circumstances of the present case to deem the prepayment made by Metrot to Boardman to be as between Metrot and MMI, a prepayment by Metrot to MMI in discharge of the liability under the prospective contract of insurance. As has been said, it is common ground between the parties that, if the payment of the premium due on renewal which Metrot in fact made to Boardman had been made to MMI, the policy would have been duly renewed. It follows that, by reason of the operation of s.14(2) in the circumstances of the case, the policy was renewed by the payment to Boardman.

10. We would dismiss the appeal.