Orb Holdings Pty Ltd v Lombard Insurance Company (Australia) Ltd

[1994] QCA 155

IN THE COURT OF APPEAL	[1994] QCA 155
SUPREME COURT OF QUEENSLAND

Appeal No. 182 of 1993

Before Fitzgerald P.
Davies JA.
Thomas J.

[Lombard Insurance v. Orb Holdings]

BETWEEN:

LOMBARD INSURANCE COMPANY (AUSTRALIA) LIMITED

Appellant

v.

ORB HOLDINGS PTY. LTD.

Respondent

REASONS FOR JUDGMENT - FITZGERALD P.

Judgment delivered 17/05/94

I agree with Davies JA and Thomas J, substantially for the reasons which they have given, that:

(i)  the respondent in fact made a misrepresentation to the appellant before the contract of insurance was entered into; namely, that the respondent's building was constructed of brick and iron;

(ii) that misrepresentation was material in the sense that a building constructed of brick and iron would have been less at risk of damage by fire than the subject building, which had two wooden walls, a wooden floor and wooden roof trusses; and

(iii) the appellant would not have entered into the contract of insurance, for the same premium and on the same terms and conditions, even if the respondent had not made the misrepresentation.

Finding (i) must be taken as subject to section 27 of the Insurance Contracts Act 1984 (Commonwealth), which is referred to further below, and the qualification that the respondent made a note on the relevant document, the proposal form, "See Survey Report".

Finding (iii) involves setting aside the contrary finding by the trial judge, but that is permissible in this instance on either view expressed in Devries v. Australian National Railways Commission (1993) 177 CLR 472.

Subject to sections 21(3) and 27 of the Insurance Contracts Act, I agree also that the consequence of findings (i) to (iii) is, by virtue of subsection 28(3) of that Act, that the appellant's liability in respect of the respondent's claim is reduced to "... the amount that would place [the appellant] in [the] position in which [it] would have been if ... the misrepresentation had not been made."
That conclusion requires finding (iii) to be further analysed. Would the appellant have entered the contract of insurance for a different premium and/or on different terms and conditions if the misrepresentation had not been made by the respondent, or would the appellant have refused to enter the contract of insurance at all ? I do not think that the obiter remarks of Deane J. in Advance (NSW) Insurance Agencies Pty. Ltd. v. Matthews (1989) 166 CLR 606 at p.622 warrant the exclusion of the second alternative from the operation of subsection 28(3) of the Insurance Contracts Act. In the present case, I agree with Davies JA. and Thomas J. that the question posed should be answered that the appellant would not have entered the insurance contract at all.
On the issues of fraud and estoppel, I have nothing to add to the reasons for judgment of Davies' JA and Thomas J.
It remains to refer again to sections 21(3) and 27 of the Insurance Contracts Act. By virtue of those provisions, the appellant cannot take advantage of either a failure to disclose or a misrepresentation by the respondent if the information given by the respondent was "obviously incomplete".

The rationale behind those provisions is that obviously incomplete information puts the insurer on inquiry and, if it omits to inquire, it has waived its right to rely upon the insured's failure to disclose or misrepresentation. As noted above, the respondent's proposal form contained not only the statement (by incorporation of a schedule) that the building was of "Brick/Iron" construction but the note "See Survey Report". That note may have suggested that additional information was or would be available in such a report.

However, it would not necessarily follow that the information given was incomplete so that it cannot be said that it was "obviously incomplete". It is a quite sensible reading of the note directing attention to the "Survey Report" that it meant that the report would provide confirmation and perhaps further details of the information contained in the proposal.

Accordingly, I agree with Davies JA and Thomas J that the appeal should be allowed and with the orders which they propose.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 182 of 1993

Brisbane
[Lombard Insurance v. Orb Holdings]

BETWEEN:

LOMBARD INSURANCE COMPANY (AUSTRALIA) LIMITED

Appellant

v.

ORB HOLDINGS PTY. LTD.

Respondent

Fitzgerald P.
Davies JA.

Thomas J.

Judgment delivered 17/05/94

Judgment of the Court

CATCHWORDS:

Counsel:	Mr. P. Dutney, with him Mr. P. Favell for the appellant Mr. J. Douglas Q.C. for the respondent
Solicitors:	Baker Johnson and Partners for the appellant Gadens Ridgeways for the respondent

Hearing Date: 16/03/94

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND Appeal No. 182 of 1993

Brisbane

[Orb Holdings P/L v. Lombard Insurance Company]

BETWEEN:

ORB HOLDINGS PTY LTD

(Plaintiff) RESPONDENT

AND:

LOMBARD INSURANCE COMPANY (AUSTRALIA) LIMITED

(Defendant) APPELLANT

JOINT REASONS FOR JUDGMENT - DAVIES J.A. AND THOMAS J.

Judgment delivered 17/05/1994

The appellant was the insurer, under an industrial special risks insurance policy, of the respondent in respect of a number of retail and commercial premises, including a building, described in the schedule to the policy as "building of shops", at 276-282 Ipswich Road, Annerley. In fact, the building was a shopping arcade. It was insured for $500,000 with an additional cover of $135,000 for loss of rent. The risks insured against included fire.

On 17 April 1988, during the currency of the policy, the building was badly damaged by fire. In consequence the respondent claimed under the policy $167,489.99 for the cost of repairs to the building and $83,786.26 for loss of rent. The claims were rejected by the appellant.

The basis of the appellant's rejection of the claims was an alleged failure by the respondent to comply with its duty of disclosure and/or a material misrepresentation to the appellant before the contract of insurance was entered into. The proposal submitted by the respondent, upon which the contract of insurance was based, under the heading "2. Property to be Insured" contained provision for the location of each property for which insurance was proposed and for description of construction of walls, roofs and floors. The respondent's representative did not complete this part of the proposal but wrote across it "As Per Schedule Attached" and "See Survey Report". The attached schedule, which contained descriptions of a number of buildings, described the subject building as "BUILDING OF SHOPS" and the construction thereof as "BRICK/IRON".

It is plain that the description of the construction of the building in the proposal was a material misrepresentation. The building had an iron roof. Two of its walls were of brick and two were of wood. The total length of the wooden walls exceeded that of the brick ones. In addition, the roof trusses were of wood and there was a wooden floor in the building.

There was evidence that the presence of wooden walls, instead of wholly brick ones, a wooden instead of a concrete floor and wooden instead of iron roof trusses materially increased the risk of damage by fire. We would be surprised if it were otherwise. The contrary was not seriously argued before us.

The appellant contended below and before this Court that, if it had known that two of the walls were of wooden construction it would not have accepted the risk. That contention was rejected below. The precise terms in which that contention should be put and its consequences depend on the application to this case of s. 28 of the Insurance Contracts Act 1984. That section provides:

"(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) had 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."

Subsection (2) has no application to the present case. No attempt was made at any stage by the appellant to avoid the contract. The relevant questions under that section therefore are: first, whether the appellant would have entered into the contract for the same premium and on the same terms and conditions even if the respondent had not made the misrepresentation to which we have referred; and secondly, if it would not have done so what is the amount which would place the appellant in a position in which it would have been if the misrepresentation had not been made. The appellant accepted below and before this Court that it carried the onus of proof on both of these questions.

There was no direct evidence that the misrepresentations induced the appellant to effect the insurance. The appellant's representative who accepted the proposal on its behalf was dead and there was no evidence as to what factors had motivated his decision.

Mr Colquhoun, who was at the time the manager of the appellant, said that if "brick/wood/iron" had been used to describe the building, an employee of Lombard would have made some enquiries to ascertain the extent of the timber. Further, he said that if the building had been inspected it would have been found to have been an "arcade" within the insurers' classification and declined because that was what the manual stipulated. That evidence was based on the existence of a re-insurance agreement and a practice which Mr Colquhoun said the appellant followed because of its existence.

The appellant was a party to a re-insurance agreement in respect of any property which it insured for over $150,000. That agreement, according to Mr Colquhoun and another witness for the appellant, determined which classes of buildings would be accepted for re-insurance above that amount and at what rate. A document described as the second defendant's 1986 risk classification, which formed part of that agreement, was in evidence. In that document shopping centres were divided into four classes: modern massive sprinklered, massive sprinklered, massive non-sprinklered, and others. Increasing rates of premium were provided from the first to the third and the fourth category was required to be declined. Similarly, arcades were divided into three categories; massive sprinklered, massive non-sprinklered, and others. Massive non- sprinklered could be accepted at a higher premium than massive sprinklered; "others" were required to be declined. The term "massive construction" was defined to mean, relevantly, all external walls entirely of brick, concrete block, concrete or reinforced concrete with floors of concrete and roofs of tile, iron or steel on iron or steel frame set in concrete. Whether the subject building was properly described as a shopping centre or an arcade, the appellant would have been obliged to decline to insure the subject building if it had known of its wooden walls or its wooden roof trusses or its wooden floor, or accept the risk of losing its re-insurance for that risk.

The evidence of Mr Colquhoun was that, notwithstanding its obligations under its re-insurance agreement, the appellant accepted for insurance over the sum of $150,000 buildings described as brick/iron. It was common ground between the parties, or at least not disputed by the respondent, that the term "brick/iron" had an accepted meaning in the insurance business of a building the walls of which were brick and the roof of which was iron. Mr Colquhoun said that such buildings were "treated" by the appellant as being of massive construction. By that we understand his evidence to mean that, if a building had walls of brick and a roof of iron the appellant was prepared to take the risk that the floor might not be concrete or the roof trusses might not be steel or iron, and that consequently it might lose its re-insurance. If, however, a building were described as wood/brick/iron it would not be treated as massive but would be the subject of further enquiries to determine the extent of wooden construction and accepted for insurance only if, in effect, the timber content was minimal.

Mr Colquhoun's evidence was also that if the appellant knew that any part of the walls of a shopping centre or arcade was not brick or concrete block or concrete it would decline the risk. The learned trial judge thought that there was evidence which was inconsistent with Mr Colquhoun's belief. He does not appear to have questioned Mr Colquhoun's honesty or general reliability. Indeed, on another issue he preferred Mr Colquhoun's evidence to competing evidence from another witness. But he thought that "Mr Colquhoun's ideal was not the reality". He appears to have derived this view from the inclusion in the policy of three other buildings: a "ballet studio and car park and offices" and two other shop buildings.

The construction of the first of these buildings was also described as brick/iron but Mr Colquhoun acknowledged that the appellant would have appreciated that a ballet studio would have had a wooden floor. It was insured for $400,000. Mr Colquhoun said that these premises "would have been classed as massive" which, in our view, is consistent with his evidence referred to above, to the effect that in respect of buildings over $150,000 the appellant was prepared to insure if it was of brick/iron construction in the sense generally accepted in the business. But, consistently with Mr Colquhoun's general evidence, it is as likely that this building was accepted for insurance because neither classification into which it could have fallen (dance studio or offices) was subject to any qualification as to construction. On any view, the company's acceptance of insurance of the ballet studio is not inconsistent with the approach described by Mr Colquhoun.

The construction of each of the shop buildings was described as wood/iron. One was insured for $70,000, the other for $82,000, both being below the re-insurance level. Although there was nothing inconsistent with the above evidence of Mr Colquhoun in accepting these risks, the learned trial judge did not think that the fact that the insurable value of each of these properties was below $150,000 was a likely explanation for the appellant's decision to insure them. Although his Honour did not say why he did not think this a likely explanation, his reason appears to be that, notwithstanding Mr Colquhoun's ideal in this respect, the reality in these and the other buildings was that there was a general failure to adhere to any rule limiting insurance of buildings which were not of massive construction.

The acceptance of the risk in respect of the ballet studio or either of the shop building at Greenslopes or Kedron was not, we think, inconsistent with the basis upon which Mr Colquhoun said the appellant was prepared to accept for insurance buildings having a value for insurance of more than $150,000.

Nor was there any other evidence which was inconsistent with that basis. There was no evidence, for example, that the appellant knowingly accepted for insurance over $150,000 a building, in respect of which the above document stated qualifications as to construction, having wooden or partly wooden walls. Consequently there was no evidence, in our view, which supported the inferences which his Honour drew.

Concealment of the fact, by describing the building as of brick/iron construction, that it had wooden walls, was a misrepresentation of such a kind as to induce an insurer to enter into a contract of insurance against fire. It may consequently be inferred, in the absence of evidence to the contrary, that the appellant did rely on that misrepresentation in accepting insurance of the building: Gould v. Vaggelas (1985) 157 C.L.R. 215 at 236, 250. Not only was there no evidence to the contrary but there was uncontradicted evidence from a witness, whom his Honour apparently otherwise accepted, of a practice from which it should be inferred that the appellant would not have entered into the contract for the same premium and on the same terms and conditions if the misrepresentation had not been made.

Before turning to two other arguments of the respondent to support the judgment below, we should say something about the appellant's allegation of fraud, persisted in in this Court, notwithstanding that because, as we have said, s. 28(2) has no application to this case, the allegation became irrelevant.

There was no evidence as to how the description brick/iron came to be included in the proposal in respect of this building. But it was nevertheless contended on behalf of the appellant that, because in respect of an earlier application for insurance, the description "wood/iron" had been used and had been altered by the respondent to "brick/iron", this was sufficient to show at least recklessness on the part of the respondent. However, the respondent's principal witness, Mr Matthews, was never cross-examined as to fraud, he had no knowledge as to how the description "brick/iron" came to be included in this or the earlier proposal and there was an explanation consistent with a quite innocent reason, namely that the brick walls were those which adjoined other buildings and consequently those which most affected external fire risks.

There was no basis upon which an allegation of fraud could

have been sustained.

The respondent submits that, even if this Court concludes, as it has, that the appellant entered into the contract of insurance in respect of the subject building on the basis of a material misrepresentation and it would not have entered into that contract, for the same premium and on the same terms and conditions, if the misrepresentation had not been made, nevertheless the appellant fails either because it is estopped, by reason of conduct to which we will shortly refer, from contending that the building was not insured; or because the appellant is deemed to have waived compliance with the duty of disclosure pursuant to s. 21(3) of the Insurance Contracts Act.

The first of these contentions relies on the words "See Survey Report" written across paragraph 2 of the proposal and the evidence by Mr Matthews, on behalf of the respondent, that there was mention by the appellant's representative of "surveys" of buildings to be done by the appellant and that in the meantime the respondent was covered. The respondent contends that if a survey had been conducted in respect of the subject building and the appellant had refused to insure it, the respondent would have sought other insurance. But it acted in reliance on representations made by the appellant, in effect, that unless the "surveys" indicated otherwise, the respondent was insured. Assuming, which is by no means clear, that there were representations by the appellant in those terms, it is plain that they would not have been made if the respondent had not concealed from the appellant the fact that the subject building was constructed substantially of wood. If it had revealed that material fact the appellant would not have accepted the risk. Accordingly those representations cannot be relied on to found an estoppel: George Whitechurch Limited v. Cavanagh [1902] A.C. 117 at 145; Doey v. London and Northwestern Railway Co. [1919] 1 K.B. 623 at 629, 631.

Section 21 speaks of the insured's duty of disclosure. Sub- section (3) provides that where a person has failed to answer a question in the proposal or given an obviously incomplete or irrelevant answer to such a question, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

The respondent contended that paragraph 2 of the proposal was obviously incomplete and that the schedule referred to in that paragraph could not have cured that incompleteness because, even if brick/iron meant walls of brick and roof of iron, that said nothing of the material which comprised the floor.

However, the appellant was not relying on the failure of the respondent to disclose the composition of the floor; it would have accepted the risk without knowing what that composition was. It was relying on the mis-statement of the building as brick/iron, meaning walls of brick and roof of iron.

Consequently any waiver of a duty to disclose the composition of the floor was irrelevant.

We turn now to the second question; whether the appellant may
refuse to pay any of the money claimed on the basis that its
liability under s. 28(3) is reduced to nil.
This was not a case in which the insurer, if it had known of
the true facts, would have accepted the risk at a greater
premium or on different terms and conditions. The evidence was
that, if it had known that two of the walls were of wooden
construction the appellant would have declined to insure.

In Advance (NSW) Insurance Agencies Pty Ltd v. Matthews (1989) 166 C.L.R. 606, Deane J., at 622, said, obiter, that the starting point of sub-s. (3) was the existence of a policy and the insurer's entrenched liability under it. That being so, any reduction of the amount of the insurer's liability under that sub-section had to be calculated on the basis of the position which would have existed if the insurer had issued a policy after full disclosure of the claim's history. If that is the only circumstance in which sub-section (3) operates then it does not apply in the present case. However, in a number of cases decided in State Supreme Courts, the sub-section has been held to apply in this situation; that is where, if the true facts had been known, the insurer would not have insured at all. In other words, it applies where the contract of insurance remains in existence to entitle the insurer to refuse to make payment under the contract because it would not have entered into it if the true facts had been known. See Lindsay v. CIC Insurance Ltd (1989) 5 A.N.Z. Insurance Cases 60-913; Ayoub v. Lombard Insurance Co. (Australia) Pty Ltd (1989) 5 A.N.Z. Insurance Cases 60-933; Twentyfirst Maylux Pty Ltd v. Mercantile Mutual Insurance (Australia) Ltd [1990] V.R. 919; Zurich Australian Insurance v. Contour Mobel [1991] 2 V.R. 146; and FAI General Insurance Co. Ltd v. Hendry Rae and Court (1993) 7 A.N.Z. Insurance Cases 61-200.

We prefer the view taken in the Supreme Court cases. Neither the wording of sub-s. (3) nor its evident purpose requires that it be limited to the case in which, if the true facts had been known, the insurer would have accepted the risk but at a higher premium or on different terms and conditions.

The appeal must therefore be allowed. The judgment below must be set aside and, in lieu thereof, there be judgment for the appellant with costs. The appellant should have its costs of this appeal.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND Appeal No. 182 of 1993

Brisbane

[Orb Holdings P/L v. Lombard Insurance Company]

BETWEEN:

ORB HOLDINGS PTY LTD

(Plaintiff) RESPONDENT

AND:

LOMBARD INSURANCE COMPANY (AUSTRALIA) LIMITED

(Defendant) APPELLANT

_______________________________________________________________

__

FITZGERALD P.
DAVIES J.A.

THOMAS J.

_______________________________________________________________

__

Judgment delivered 17/05/1994

JOINT REASONS FOR JUDGMENT OF DAVIES J.A. AND THOMAS J.

SEPARATE CONCURRING REASONS OF FITZGERALD P.

_______________________________________________________________

__

APPEAL ALLOWED. JUDGMENT BELOW SET ASIDE AND IN LIEU THEREOF
JUDGMENT ENTERED FOR THE APPELLANT WITH COSTS.

THE RESPONDENT TO PAY THE APPELLANT'S COSTS OF APPEAL.

_______________________________________________________________
__

CATCHWORDS: INSURANCE - CONTRACT - misrepresentation and non-disclosure - appellant was insurer of premises owned by respondent - premises badly damaged by fire - premises had been described in schedule to policy as of brick/iron construction - premises in fact had partly wooden walls - material misrepresentation - respondent's claim rejected -whether evidence to support inference that appellant would have accepted the risk even if it had known of the wooden walls - s. 28 Insurance Contracts Act (Cth) - whether appellant estopped by conduct from contending that building not covered - whether deemed waiver by appellant of compliance with duty of disclosure - s. 21(3) Insurance Contracts Act - whether appellant's liability in respect of claim reduced to nil - s. 28(3) Insurance Contracts Act

Counsel:  P. Dutney Q.C. with him P. Favell for the
Appellant
J. Douglas Q.C. for the Respondent

Solicitors: Messrs Baker Johnson & Partners for the

Appellant

Messrs Gadens Ridgeway for the Respondent

Date(s) of Hearing:  16 March 1994