Midaz Pty Ltd v Peters McCarthy Insurance Brokers Pty Ltd

[1998] QCA 21

IN THE COURT OF APPEAL	[1998] QCA 021
SUPREME COURT OF QUEENSLAND

Appeal No. 5198 of 1996.

Brisbane

[CIC Insurance Ltd v. Midaz P/L & Anor.]

BETWEEN:

CIC INSURANCE LIMITED
(ACN 004 078 880)

(Second Defendant) Appellant

AND:

MIDAZ PTY LTD (ACN 006 397 584)

(Plaintiff) First Respondent

AND:

PETERS McCARTHY INSURANCE BROKERS PTY LTD
(ACN 010 931 647)

(First Defendant) Second Respondent

___________________________________________________________________________

Pincus J.A.
Moynihan J.

Byrne J.

___________________________________________________________________________

Judgment delivered 3 March 1998

Separate reasons for judgment of each member of the Court, all concurring as to the orders made.
___________________________________________________________________________

1.          APPEAL DISMISSED.

2.          APPELLANT TO PAY THE COSTS OF BOTH RESPONDENTS OF AND INCIDENTAL TO THE APPEAL.

3.          FIRST RESPONDENT’S NOTICE OF CROSS-APPEAL IS STRUCK OUT.

___________________________________________________________________________

CATCHWORDS: Civil - Insurance - interim contract of insurance - premises consisted of a number of units - fire started in a unit which contained inflammable materials - insured did not know that inflammable materials were stored on the premises - whether insured should have disclosed existence of inflammable materials to insurer - whether, if disclosed, insurer would not have accepted the risk - whether s. 28(3) can have the effect of removing an insurer’s liability altogether.

Insurance Contracts Act 1984 (C’th) ss. 21(1) and 28(3)

Counsel:	Mr P Hack for the appellant. Mr M Daubney for the first respondent. Mr P Applegarth for the second respondent.
Solicitors:	Dunhill Madden Butler for the appellant. McLaughlins for the first respondent. Minter Ellison for the second respondent.
Hearing date:	19 February 1998.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5198 of 1996.

Brisbane

Before Pincus J.A.

Moynihan J.

Byrne J.

[CIC Insurance Ltd v. Midaz P/L & Anor.]

BETWEEN:

CIC INSURANCE LIMITED
(ACN 004 078 880)

(Second Defendant) Appellant

AND:

MIDAZ PTY LTD (ACN 006 397 584)

(Plaintiff) First Respondent

AND:

PETERS McCARTHY INSURANCE BROKERS PTY LTD
(ACN 010 931 647)

(First Defendant) Second Respondent

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 3 March 1998

This is an appeal in a case concerning insurance on a property damaged by fire. The insured

first respondent (Midaz) brought an action in the District Court against its brokers (Peters) and against

the insurer (CIC); it obtained judgment for the amount of its loss against CIC and judgment for nominal

damages against Peters. CIC now appeals, seeking a reversal of the judgment Midaz obtained against

it; CIC also challenges an order for costs made by the primary judge.

The action was brought on an interim contract of insurance relating to premises at Ashmore

consisting in a number of units, one of which (No. 5) was the source of the fire. Unit 5, the evidence

showed, contained inflammable materials used in a business of selling, and perhaps mixing liquids to

make up, nail polish and allied substances. The essence of the case of the appellant insurer CIC, as put

by Mr Hack on its behalf, is that there should have been disclosed to it the fact that Unit 5 contained

inflammable materials; Mr Hack also argued that had that been disclosed CIC would not have

accepted the risk.

From August 1991 there were communications between CIC on the one hand and Peters acting

for Midaz on the other, the intention of which was to arrange a contract of insurance relating to the

Ashmore property to which I have referred. It consisted of nine units some of which were tenanted;

one of the tenanted properties was Unit 5. There followed other events which are only marginally

relevant, and need not be recounted here. Early in June 1992 a Mr Zuccala, on behalf of Midaz,

telephoned Peters asking for policy documents relating to certain properties including the property the

subject of these proceedings. Peters could not locate the relevant documents and, concerned about the

properties not being insured, contacted a Mr Eyles, an employee of CIC. There was discussion as to

what had happened, up to that point, about insuring the properties; the evidence suggests that mistakes

had been made both by Peters and CIC in the process of effecting the intended insurance. Mr Eyles

was asked by Peters on 17 June 1992 to issue cover for the premises: Mr Eyles, in a statement he made

which was received in evidence, said:

"I advised that I could not back date cover, and could issue cover from that time on the
Wednesday afternoon, and that we could sort out the premium details later . . .
No changes to the risk were advised to me, and I agreed to effect cover on the basis
of my quote."
In his oral evidence Mr Eyles added - a point not specifically mentioned in the statement to

which I have referred - that he asked Peters if there had been any material change to the risk and was

told that there had not; it was not argued for CIC that that answer was untrue. Although no cover note

issued, what was intended to be temporary cover was effected by the conversation I have mentioned.

It was on the following day, 18 June 1992, that there occurred a fire in Unit 5 which gutted that unit

and damaged adjoining parts of the building; there is no suggestion that the fire was other than

accidental.

Mr Hack set out to persuade us that the primary judge should have reached conclusions

favourable to the appellant under two provisions of the Insurance Contracts Act 1984 (C’th), namely

s. 21(1) and s. 28(3). The Act applies to the contract of insurance which is in question, not being of

a type excepted by s. 9. Section 21(1) reads as follows:

"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."

It will be noted that the duty is not expressed to extend to any matter unknown to the insured;

the language does not suggest an intention to cover matters which should have been known but were

not. Mr Hack relied on para. (b) of the provision rather than (a) and his contention was that Midaz,

through Mr Zuccala, knew that the tenant of Unit 5 had liquids relating to a nail polish business stored

there and that a reasonable person, in the circumstances, could be expected to know that fact to be relevant to the decision of the insurer whether to accept the risk and if so on what terms. Mr Hack

contended that this was so because Mr Zuccala should have appreciated that the stored liquids were

inflammable. There was no discussion before us about the precise meaning of "inflammable"; no doubt

many or most liquids will burn, under particular conditions.

The consequences of a breach of the insured’s duty of disclosure are defined by s. 28 which

I set out in full; insofar as it deals with misrepresentations the section is not material to the present case:

"(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 the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made."

Mr Hack contended, not that CIC was entitled to avoid the insurance contract, but that its

liability in respect of the claim made by Midaz should be reduced to nil under s. 28(3), on the basis that

if CIC had known that inflammable liquids were stored on the premises it would not have accepted the

risk: Orb Holdings Pty Ltd v. Lombard Insurance Company (Australia) Limited [1995] 2 Qd.R. 51

at 57, 58. In that case this Court accepted that s. 28(3) can have the effect of removing an insurer’s liability altogether: the contrary was held to be so in Advance (N.S.W.) Insurance Agencies Pty Ltd

v. Matthews (1989) 166 C.L.R. 606 at 622. We should follow the Orb Holdings view, which in my

opinion is, with respect, correct.

It is proposed to deal with these two provisions further, in order. As to the former, the reasons

for judgment contain no finding that Mr Zuccala knew that any relevant liquids were stored on the

premises. The learned primary judge made the following findings :

"Zuccala knew that the premises damaged by fire, that is, the premises ultimately damaged by fire, had been used and at all material times were being used not as a beauty clinic; that Midaz knew that those premises were being used for supplying nail products, the expression ‘nail’ being a reference to the nails upon the human hand and foot, but not that Midaz knew that the use involved the storage and use of the inflammable liquids mentioned in evidence and not that Midaz knew that that use or those uses or that interval of use included the manufacturing of those products."

His Honour’s reference to a beauty clinic is prompted by the circumstance that CIC was told

that that was the nature of the occupancy of Unit 5; that statement was not correct and Mr Hack

attempted to place some reliance upon this aspect. However, we were referred to no findings or

evidence to support a conclusion that CIC would not have accepted the risk had Unit 5 been used in

any other way than for a beauty clinic, so that mis-description is immaterial.

It will be noted that his Honour was not prepared to hold that Midaz knew of the storage and

use of the inflammable liquids mentioned in evidence. There is no finding as to whether or not Midaz

knew that any substantial quantity of liquids of any sort were stored in Unit 5.

Mr Daubney, for Midaz, pointed out that at the trial CIC gave particulars of its allegation that

the business conducted in Unit 5 involved the storage and use of flammable liquids, by reference to the

evidence of one S V Goodwin; that witness gave rather precise details of the volumes of various named

substances which were stored in Unit 5. There was no evidence suggesting that Midaz was aware of

those details of what was stored, as given by Mr Goodwin.

No doubt, despite the particulars mentioned, CIC might have sought to succeed on the basis

of proof of Midaz’s awareness of the presence of chemicals of the specified varieties referred to in

Goodwin’s evidence and that Midaz knew there were substantial quantities of those chemicals, but not

the particular quantities mentioned by Goodwin. But Mr Hack referred us to no evidence supporting

that view of the matter. Mr Zuccala gave evidence that Midaz and another company of which he was

a director owned a number of properties; he said in effect, in relation to tenanted parts of the

properties, that he would seldom go "behind the office". Mr Zuccala, with reference to Unit 5, denied

that he knew precisely what was going on there and said that he knew only what could be seen from

the front entrance, from which he noted that there were some bottles on a shelf. Mr Zuccala’s evidence

about what was visible from the front of the premises was supported by the evidence of

Mr R M Harrison and there was not any evidence to contradict it. When he was cross-examined

below, it was not put to Mr Zuccala that what he said he saw at Unit 5 was incorrectly stated.

In its plaint as originally pleaded, Midaz set up against Peters that it had breached its duty as

broker by failing to tell Midaz that the approved use of Unit 5 for the manufacture of nail care products

should be disclosed to CIC. That was a reference to cl. 4 of a tenancy agreement between Midaz and a company called Limrac (Qld) Properties Pty Ltd, dated 1 June 1991; the clause required the tenant

not to use or permit the premises to be used for any purpose other than "wholesale and manufacture of

Nail Care Products . . ." . Mr Zuccala was cross-examined about this and related matters by Mr

Applegarth, counsel for Peters. Having read that evidence, I find it difficult to summarise its effect; the

general impression given is that Mr Zuccala had no clear recollection of precisely what he knew about

the activities in Unit 5 at relevant times, but he seemed to say that he was unaware of any manufacturing

being carried on.

The judge declined to find that Midaz knew that the use made of the premises included

manufacturing of nail products. That conclusion is not challenged by Mr Hack and, in the rather

uncertain state of the evidence on the point, this Court would not be justified in differing from his

Honour’s view. But there remains the question whether the appellant can succeed, so far as the s. 21

issue is concerned, on the basis that the judge should have found (as he did not) that Midaz knew that

in Unit 5 there were substantial quantities of fluids, connected with the business of nail products. I have

referred above to the way in which CIC pleaded Midaz’ knowledge and have suggested that no

excessively pedantic approach to the particulars given is warranted. But, in my opinion, Midaz is at

least entitled to hold CIC to its pleading to the extent that complaint is made of the failure to disclose

that the business conducted in Unit 5 "involved the storage and use of flammable liquids" (see

para. 10(b)(iii)(c) of CIC’s defence), if not to the extent of holding CIC to a case that the liquids were

those specified in its particulars - acetone and so forth. CIC did not obtain from the primary judge, nor

does Mr Hack now press for, a finding in terms of the allegation in the defence just quoted; Mr Hack’s

main contention is that the Court should proceed on the basis that Midaz knew there were substances stored on the premises and further that the circumstances were such that a reasonable person could be

expected to know that the presence of the liquids was relevant to an insurer’s concerns; that was so,

as I understood the argument, because a reasonable person could be expected to know the liquids to

be inflammable.

Acceptance of that argument must depend on adoption of a construction of s. 21(1) which is

rather generous to insurers: that the section means that if an insured knows matter A which is not in itself

relevant to insurance, but the insured should reasonably infer from matter A a further matter B which

is so relevant, then the duty to disclose matters A and B arises. This construction is in practical terms

little different from reading the introductory part of s. 21(1) as if it included the expression ". . . every

matter that is known to or should be inferred by the insured".

I have found no authority which supports such a reading, nor does it appear to be one which

must be adopted to give s. 21(1) a sensible operation. The conclusion, as to s. 21, is that there was no

such duty to disclose, in relation to the liquids present in Unit 5, as is set up. It should be added that

the learned primary judge adopted, as a reason for rejecting the argument that there was such a duty,

the view that the question of disclosure had been postponed by CIC; I did not understand Mr Daubney

to attempt, on Midaz’ behalf, to defend his Honour’s judgment on that foundation.

In my opinion the argument for CIC on s. 21 fails; that is enough to justify dismissing the

appeal. But since the second question involved in the case, namely the effect of s. 28(3) which I have

quoted above, was argued and may be dealt with fairly briefly I shall express my view about it. The primary judge thought that the view that if Midaz had "fully performed . . . its duty to disclose by

revealing its actual knowledge consistently with section 21" that would have made no difference to

CIC’s actions was a view which had "much strength". His Honour explained that the basis of that

conclusion was that "the source of the serious insurance risk was the presence of the inflammable

materials" and, as I understand the reasons, that Midaz did not know that the materials were

inflammable. So merely disclosing that there were liquids present should not, logically, have made any

difference to CIC’s acceptance of the risk. That is plainly so, but counsel for Midaz and for Peters

advanced still another objection to CIC’s case under s. 28(3). This was that, although CIC produced

evidence that it would have rejected the risk had it known of the nature of the materials in Unit 5, there

was much evidence throwing doubt upon that. I have looked at the latter evidence which, on the face

of it, makes the CIC evidence (given by Mr Eyles) that had the facts been known the risk would have

been declined rather dubious. If one assumes, contrary to the view I have expressed, that Midaz had

a duty to tell CIC that there were inflammable liquids stored in Unit 5, still it does not appear to have

been satisfactorily established that that would have led to the rejection of the request to insure put

forward on behalf of Midaz which was, it must be remembered, merely one for temporary insurance,

covering property much more extensive than Unit 5 itself.

It does not appear necessary to say anything more about the s. 28 issue. The remaining

question raised by Mr Hack was whether the judge below was right in making an order, as his Honour

did, that CIC pay Peters’ costs below as well as those of Midaz. His Honour made that order because

he thought that Midaz had reasonably joined Peters; that it had done so was I think clear, for the judge

held that Peters had breached its duty to Midaz. His Honour held that Peters, having been retained to

insure the property from October 1991, had failed to do so and therefore Midaz was entitled to nominal

damages as against Peters, fixed at $100. But for the circumstance that the judge held that effective

insurance cover had begun on 17 June 1992, covering the fire which occurred on 18 June 1992,

judgment would have gone against Peters for the amount of Midaz’ loss.

A consideration against the costs order made is that justice might have been thought to be done

by requiring Peters to pay Midaz the costs of the claim, against it, which was successful insofar as

nominal damages were awarded. On the other hand, there are two factors which support the propriety

of the order. One is that, had it not been for CIC’s rejection of the claim under the contract of

insurance, on grounds which seem to me to have been fairly tenuous, there would never have been a

need for Midaz to sue Peters, or indeed for any action at all. Another is that, as was emphasised by

Mr Applegarth on behalf of Peters, it had to defend itself against a pleaded assertion by CIC that it was

guilty of fraud in relation to the obtaining of cover; that allegation failed. It is my opinion that the costs

order made was not only within the bounds of a sound exercise of discretion, but was right.

At the hearing before us Midaz was given leave to file a notice of cross-appeal relating to its

claim against Peters; that was done in case CIC’s appeal succeeded.

The orders will be:

1.          Appeal dismissed.

2.          The appellant to pay the costs of both respondents of and incidental to the appeal.

3.          The first respondent’s notice of cross-appeal is struck out.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5198 of 1996

Brisbane

Before Pincus J.A.
Moynihan J.
Byrne J.

[CIC Insurance Ltd v. Midaz P/L & Anor]

BETWEEN:

CIC INSURANCE LIMITED

(ACN 004 078 880)

(Second Defendant) Appellant

AND:

MIDAZ PTY LTD

(ACN 006 397 584)

(Plaintiff) First Respondent

AND:

PETERS McCARTHY INSURANCE BROKERS PTY LTD

(ACN 010 931 647)

(First Defendant) Second Respondent

REASONS FOR JUDGMENT - MOYNIHAN J.

Judgment delivered 3 March 1998

I agree with the orders proposed by Pincus J.A. As he and Byrne J. demonstrate in their

reasons, the factual basis necessary for the appeal to succeed was not made out at the trial.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5198 of 1996

Brisbane

Before Pincus JA

Moynihan J

Byrne J

[CIC Insurance Ltd v. Midaz P/L & Anor]

BETWEEN:

CIC INSURANCE LIMITED

(ACN 004 078 880)

(Second Defendant) Appellant

AND:

MIDAZ PTY LTD

(ACN 006 397 584)

(Plaintiff) First Respondent

AND:

PETERS McCARTHY INSURANCE BROKERS PTY LTD

(ACN 010 931 647)

(First Defendant) Second Respondent

REASONS FOR JUDGMENT - BYRNE J.

Judgment delivered 3 March 1998

The comprehensive way in which the facts germane to this appeal are described by Pincus JA

permits me to state concisely my reasons for concluding that this appeal must fail.

Mr Hack conceded that the appellant (“CIC”) could not challenge a conclusion that the first

respondent (“Midaz”) did not know that the use of the premises, where the fire occurred, involved the

storage and use of “flammable” liquids. He contended, however, that the evidence establishes that Midaz knew that “bulk nail polish products” were kept there. From this he proceeded to submit that

a reasonable person, knowing that such products were stored at the premises, would have appreciated

both that those products would be “flammable” and that CIC could have been expected to regard their

presence as a matter relevant to its decision whether to accept the risk, and, if so, on what terms.

Among the difficulties this case confronts is the state of the evidence concerning Midaz's

knowledge of the tenant's use of the premises. (For present purposes, as Mr Hack accepts, Midaz

knew no more than the information possessed by its controller, Mr Zuccala.) The little evidence

adduced on this issue is summarized by Pincus JA and I will not repeat it. Midaz knew that the premises

were being used to sell nail products. Midaz did not know that the use included “manufacturing” such

products. Importantly, the evidence did not establish that Midaz actually knew of the presence on the

premises of any substantial quantity of products which happened to be flammable, still less that Midaz

was aware of the storage of substances it knew to be flammable. In other words, the factual foundation

essential to the appellant's argument - that Midaz knew of the storage of bulk nail polish products - was

not made out. That suffices to dispose of this case.

As to the appeal against the order for costs, I agree with what Pincus JA has written.

I therefore agree in the orders proposed by Pincus JA.