Permanent Trustee Australia Ltd & Anor v FAI General Insurance (In Liq)

[2002] HCATrans 382

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S124 of 2002

B e t w e e n -

PERMANENT TRUSTEE AUSTRALIA LIMITED

First Appellant

PERMANENT TRUSTEE COMPANY LIMITED

Second Appellant

and

FAI GENERAL INSURANCE COMPANY LIMITED (IN LIQUIDATION)

Respondent

McHUGH J
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 8 OCTOBER 2002, AT 10.15 AM

Copyright in the High Court of Australia

MR R.J. ELLICOTT, QC:   Your Honours, I appear with MR J.T. SVEHLA and MR G.A. ELLIOTT for the appellants.  (instructed by Church & Grace) 

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR E.G. ROMANIUK, for the respondent.  (instructed by Colin Biggers & Paisley) 

McHUGH J:   Mr Ellicott, what is the position with FAI?  Is it still in provisional liquidation, do you know? 

MR ELLICOTT:   In liquidation. 

McHUGH J:   It is in liquidation, is it? 

MR ELLICOTT:   Yes. 

GUMMOW J:   Well, we will have to change the title. 

MR ELLICOTT:   I think the appeal may have been started off in liquidation, but then there was a request, I thought, to change the name.  I did not quite understand ‑ ‑ ‑

McHUGH J:   Well, the title of the proceedings ‑ ‑ ‑

MR ELLICOTT:   It was below. 

McHUGH J:   ‑ ‑ ‑ will have to be changed.  I will make an order giving you leave to change the title of the matter.  There is one outstanding matter as well.  There is an affidavit from Ms Middleton concerning documents.  As far as I can see, it does not seem to have much relevance apart from discharge of an obligation to ‑ ‑ ‑

MR ELLICOTT:   Under the Rules. 

McHUGH J:   Yes. 

MR ELLICOTT:   Of course, it was a very long trial and it has turned out to be a very burdensome requirement, but we do seek to ‑ ‑ ‑

McHUGH J:   Well, is it sufficient we just note the affidavit? 

MR ELLICOTT:   If your Honour pleases. 

McHUGH J:   Yes.  Have you anything to say, Mr Jackson? 

MR JACKSON:   No, your Honour. 

McHUGH J:   Yes. 

MR ELLICOTT:   Your Honours, there are five matters or five issues about which submissions have been put in.  I just wanted to say the fourth issue in relation to statement, although there may be much to be said for it, we do not propose to advance argument in relation to that.

McHUGH J:   Does that mean you do not rely on it or you do not put any argument in support?

MR ELLICOTT:   I suppose it does mean it because it seemed on reflection that the view of the Court of Appeal was necessary in order to make the Act work.  In other words, that not only statements in the strict sense, but also people’s actions, silence, conduct, et cetera, were too embedded ‑ ‑ ‑

McHUGH J:   You have been convinced by the biblical reference, have you?

MR ELLICOTT:   Yes, I was looking for that, your Honour, because that biblical attitude seems to come up again in the issue of fraud, but I will come to that a little later, your Honour.

As your Honours know, the first issue is of some significance because it requires the Court to consider the meaning of the words in section 21(1)(a):

the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk –

The particular matter here we have set out in paragraph 16 of the submissions, and if I might just refresh your Honours’ minds as to that.  The primary judge said:

In my opinion, the true position is that the Permanent companies had, prior to 30^th September 1991, decided that quotes should be obtained from insurers other than FAI, which should then be considered before any approach was made to FAI, and had through Sedgwick Australia actually set about doing this; the Permanent companies contemplated that, so long as the quotes from other insurers were satisfactory, then FAI would not be invited to participate; and the broker, Sedgwick Australia, had been instructed accordingly.  In my opinion, it is not therefore strictly correct to say that the plaintiffs had, prior to the 30^th September 1990, decided that FAI was to be replaced as an insurer of the plaintiffs.

That is a mouthful but, basically, we call it that there was a possibility ‑ my friends have tackled that and said it was more than a possibility.  I suppose one has to concede there was a real chance, but it did depend on the other quotes, being satisfactory, there was a real chance that FAI would not be invited to renew, and it is that matter that it is alleged should have been disclosed.  It is the matter which we say is not relevant to the assessment of the risk; it is a matter that was a commercial consideration and in the course of the evidence it became quite clear that what caused the reaction, or the likely reaction, of FAI was the fact that they had a very poor relationship at that time with Sedgwick London, but I will come to that later.

Your Honours will know that this was a very significant reform, that is to say the Insurance Contracts Act.  I say that at the outset because it is important to bear in mind in one’s consideration of this Act that it was designed to alleviate the position of the insured and this restatement, as it were, of the duty of disclosure was intended to lift the burden I guess from all of us, because all of us, throughout Australia, from time to time are taking out policies which would fall within the purview of this particular Act.  So the preamble of the Act is instructive:

An Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly, and for related purposes.

In the second reading speech of 29 May 1984 this was said:

Other authorities –

and they seem to have found favour in Australia –

have rejected this approach in favour of the “prudent insurer” test i.e. a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether it will accept the insurance, and if so, at what premium and on what conditions.

This rule imposes too strict a duty on the insured.  Clause 21 both clarifies and ameliorates the existing law.  It clearly states that the insured’s duty is only:

to disclose those facts which he knows or which a reasonable person in the circumstances could be expected to know would be relevant –

to the insurer’s assessment of the risk.

As an examination of what a reasonable man would know cannot take place in a vacuum, a court would not be precluded from considering an insured’s position and circumstances in applying the test.

We submit at the outset that any interpretation which extended the common law test – and I will come back to that in a moment – would be antithetical to the Act because it is likely of course to operate against the intent of Parliament to ameliorate the burden on the insured.

Of course, as I have already said, one has to see the scope of the Act that it covers all aspects of general insurance with certain limited exceptions and it also covers life insurance.  Therefore, ordinary people, we say, should not be burdened more than necessary to protect the interests of the insurer.  It may be helpful to consider at the outset what a contract of insurance in simplicity really does.  Kelly and Ball in their Principles of Insurance Law ‑ ‑ ‑

KIRBY J:   Could I just interrupt to ask:  what is the status under the Act - I have forgotten – of the uberrimae fides principle?

MR ELLICOTT:   That is dealt with in section 12.

KIRBY J:   Would that not have required – at least at common law it was an unusual contract.  If you are starting back at basics, which I find helpful myself, would you not say that under the old law – let us start with the old law – you would have to reveal this fact because you are not in an ordinary arm’s length relationship; you are in an insurance relationship.  I would have thought that if you are likely not going to go ahead with insurance with the insurer that under the old law you would in candour have had to reveal that fact.

MR ELLICOTT:   No, to the contrary, your Honour, as I hope to convince your Honours by the end of my argument, that it would have been the other way.  Indeed, when the legislature in the second reading speech of the Attorney‑General picks up the notion, he does not use the words “acceptance of the risk”.  He translates it to mean the assessment of the risk.

KIRBY J:   Is this a change wrought by the new Act?

MR ELLICOTT:   No.

KIRBY J:   Or do you say it is something that existed at common law as well?

MR ELLICOTT:   We say it is something that existed at common law.

KIRBY J:   Can I just explain my response and it may be caught up in those words “moral hazard”; that if one is applying a “moral hazard” approach then it is somewhat offensive that your clients’ employee gets on the phone and without revealing how they are thinking, what they are going to do, what they are probably going to do, that he goes ahead and, in a sense, misleads the insurer?

MR ELLICOTT:   Well, we have to come to that, too, your Honour, as to whether it was misled.  But if your Honour had a large number of insurances, if your Honour had a number of properties and your Honour was insured with the NRMA and a particular insurance had come up and you had become dissatisfied with the NRMA and you thought, “Well, later in the year I think I will terminate those other policies”, is your Honour under a duty ‑ or may have made a decision to do it – to tell them that you are going to take all your business away from them?  I would submit not.

KIRBY J:   Well, maybe not in general, but if you are asking for a favour, that is to say, the extension of 30 days, it at least raises the question in my mind that you have to say, “Well, we are asking you the favour and, by the way, we really feel in candour and out of the good faith that we owe you, we have to tell you that” ‑ ‑ ‑

MR ELLICOTT:   Your Honour, I will come to that, but it really raises questions under other issues, but what we are concerned with here, is the meaning of the words, “the decision of the insurer whether to accept the risk and, if so, on what terms”, and if it is not known to be relevant to that matter, then it does not have to be disclosed, and we do say that the words, “whether to accept the risk” had a meaning at common law which involved the notion of assessment of the risk or take the risk, and that is why I suggested that it might be helpful to just have a look, in its simplicity, what a contract of insurance is about, and after all, section 13, “The duty of the utmost good faith”, is about a contract for insurance, not about some other contract, not about the renewal of some contract but about this contract for insurance.  Insuring against professional negligence for 30 days, that is the contract we are concerned about, being an extension of an existing contract of insurance.  Kelly and Ball say:

The purpose of a contract of insurance is to transfer the risk of loss that arises from the insured’s interest in the subject matter of the insurance ‑ ‑ ‑

McHUGH J:   What page?

MR ELLICOTT:   Page 1991 paragraph 1.11 ‑

and the contract transfers the risk from someone who has much of the information peculiar to the risk to someone who may not.

When it is borne in mind that what is being transferred is risk and that the duty of disclosure has always been seen as related to that and if so, on what terms and conditions, then it enables, we would submit, some better idea of what the legislature had in mind when they said “relevant to the decision of the insurer whether to accept the risk.”  Now, of course, the Court of Appeal has held that the words “relevant to the decision . . .  whether to accept the risk” mean no more than whether to enter into the contract of insurance because that is how you accept the risk.  You enter into a contract of insurance.

But this is something that happens before one enters into the contract.  The disclosure has to be made to the insurer before the relevant contract of insurance is entered into.  That is what the section says.  It is the risk that is being transferred and it is the assessment of the risk, whether to take the risk, and the words “accept the risk” are not words that are new to the statute.  Those words are found in the Pegler test – and I will take your Honours to it in a moment – that was Mr Justice Samuels’ version of it, and that was approved by the Privy Council.

KIRBY J:   That was approved by the Privy Council and it has been applied many times.

MR ELLICOTT:   So the words “acceptance of the risk” were in the common law test.  There is no need to give them some special meaning based on contractual notions of accepting an offer.  That is not what it is about.  It is about whether or not it is relevant to the insurer in deciding to take that risk or accept that risk or in assessing the risk that is being transferred.  In this case, the question of renewal had nothing whatsoever to do with the question of risk.  It did not matter two hoots whether or not the renewal took place so far as the premium is concerned and the assessment of the risk is concerned.  It would have been just the same.

KIRBY J:   But I thought it was an agreed fact that had the insurer known that you were in the position that you were in, that they would not have agreed to extend the insurance for 30 days.

MR ELLICOTT:   Yes, and they said that in the most emotional terms possible.  “I would’ve told them to ‘P’ off”, one of them said.  There are all sorts of ways that the witnesses expressed it, but it was emotional and it was emotional because great heat had been generated between Sedgwick London, on the evidence, and FAI because FAI’s credit rating was reduced to Standard and Poors BBB ‑ ‑ ‑

McHUGH J:   Minus.

MR ELLICOTT:   ‑ ‑ ‑ and that assessment was a real question, so they said they would have reacted in that way.  Of course, we do not know how they would have reacted because we do not know, but so far as risk is concerned ‑ ‑ ‑

KIRBY J:   There is a finding on that, is there not?

MR ELLICOTT:   Yes.

KIRBY J:   I thought you did not dispute that.

MR ELLICOTT: I do not dispute the background fact, but what I dispute of course is the definitional approach taken by the Court of Appeal to these passages. Perhaps I should indicate to your Honours the particular passages and questions. They appear in 50 NSWLR 679, that is the Court of Appeal’s judgment. If your Honours go to page 686 in paragraph 29:

Mr Ellicott also sought support from pre‑Act authority on the meaning of risk, but they are not relevant ‑

they were not even discussed by his Honour ‑

because the meaning of the section, for present purposes, is tolerably clear.  The matter to be disclosed must be “relevant to the decision of the insurer”.  This is a decision whether to accept the risk and if so on what terms, and it is not simply a decision about the risk.  Risks are accepted by contracts of insurance.  The section refers to decisions whether to accept risks by entering into contracts.

GUMMOW J:   Well, you fix on that, do you not, as offer and acceptance language?

MR ELLICOTT:   I do, yes, and that is basic to our approach to it.  The fact that the duty - first of all, fixing one’s gaze on what this contract of insurance is about and then looking at the common law test one sees that the words are not lifted out of Salmond and Williams on Contracts, or whatever it may have been, but they are lifted out of the common law of insurance.  Risk we have dealt with.  I had not in mind to take your Honours to the particular pages, but in paragraphs 31 and 32 of our submissions we set out, I think, in footnotes, some of the various meanings given.

First of all, in 31, “risk” in relation to insurance is defined as the hazard or chance of loss; the degree of probability of such loss; the amount which the insurance company may lose.  This ordinary meaning of “risk” has been accepted and applied, et cetera.  Couch, in that footnote 44(b): 

“In order to have a contract of insurance there must be a risk which is specified or capable of identification, since a risk which is the coverage of the contract is of the very essence of insurance.  In general, the risk may be any uncertain event which may in any way be of disadvantage to the party insurance.  It should relate to a possibility of real loss which neither the insured nor the insurer has the power to avert or hasten.” 

KIRBY J:   If you talk about the common law, Mr Jackson, in his submission, says that there is no readily identifiable case, in all the hundreds of years of writing insurance, that you can point to where the fact of the type with which this case is concerned has been held not material. 

MR ELLICOTT:   Well, I am going to take your Honour to such a case, and ‑ ‑ ‑

KIRBY J:   You have found one case. 

MR ELLICOTT:    ‑ ‑ ‑ your Honour may disagree with me – a very recent case.  But, anyhow ‑ ‑ ‑

KIRBY J:   No, I find this quite an interesting case ‑ ‑ ‑

MR ELLICOTT:   Yes, your Honour, and it is ‑ ‑ ‑

KIRBY J:    ‑ ‑ ‑ but I just felt I ought to express the contextual element of uberrima fides, which is preserved by the statute, which, as I understand it, Mr Welsh did not feel comfortable with what he was asked to do. 

MR ELLICOTT:   Yes.  But, also ‑ ‑ ‑

KIRBY J:   He was really misleading them, was he not? 

MR ELLICOTT:   One has to understand that we are dealing with a statute that was intended, not to increase the responsibility of disclosure, but the Australian Law Reform Commission, in this particular report ‑ ‑ ‑

KIRBY J:   I remember it well. 

MR ELLICOTT:    ‑ ‑ ‑ emphasises that its purpose is to ameliorate the position of the insured and therefore not to increase the scope of disclosure.  It uses the expression which, in substitution for the words in the very statute which it was recommending, the Bill – this was one of those rare occasions when the Bill was very close to what was ultimately enacted.  In other words, the draft Bill and the Law Reform report had basically this provision in it.  But when they came to discuss it – and I will take your Honours to it ‑ they talked about the assessment of the risk. 

So when one comes to look at these words, we say, both the Attorney‑General in the Parliament and the Law Reform Commission has equated them with assessment of the risk – that is to say, answering the question, “Will I take this risk or will I not?  Is it too chancy?  Is there a physical hazard involved, or is there a moral hazard?”  We are not talking about the morality of fraud or fraudulent misrepresentation or the non‑disclosure of other matters; we are concerned about matters which are relevant to, we say, the acceptance of the risk in the statute, meaning the assessment of the risk. 

If your Honours go to paragraph 33 of our submissions, you will find set out there the Pegler test.  Justice Samuels said:

It seems to me that the test of materiality is this:  a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions.

It is very odd that those seem to be the very words that are in the statute, but the Court of Appeal does not even give consideration to that.  It says the words are tolerably clear and introduces these contractual notions.  But one has to go behind it, I would submit, although this Court has said in Advance Insurance v Matthews 166 CLR 606 at page 615:

The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt IV.  To that extent Pt IV is a statutory code which replaces the common law.  Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited.  However, in the light of our view as to the meaning –

et cetera.  Now, that was the view expressed and we do not, of course, seek to depart from that, but we say that here the common law has been adopted, in effect, in the phraseology of this section and therefore ‑ ‑ ‑

HAYNE J:   Yes, but is that right?  Pegler posits, does it not, an objective test by referring to the mind of a prudent insurer?

MR ELLICOTT:   Your Honour is quite correct limiting what I have just said, because the hypothetical prudent insurer is removed and one looks at what is known to the insured that is relevant to the risk.  So that hypothesis is taken away.  But the test – I will call it materiality, if one likes – the test of materiality or the test of relevance we say is basically the same and you go beyond the contractual notions of acceptance and you embrace the notion that one finds in the cases, in the Pegler test, and that, one would say, raises the question:  would this have been a matter that would have been disclosable at common law? 

We would submit not.  If it is not, then it is quite unlikely that a Parliament that is trying to limit the duty of insureds is going to provide that anything – and this is why hard cases do not make good law – which an insured knows relevant to the contract or relevant to whether the insurer will decide to enter into it would place a very large burden on a lot of not just large companies, but ordinary people.  Most of the people who have to make these decisions are millions of Australians.  Are they to be asked to say to themselves, first of all, “Now, what do I know that might affect the decision of this insurance company to enter into this contract?”  Not just affecting the risk that is involved.  Of course, if I have been refused insurance or if I have a conviction and those sorts of things, I ought to know that those should be included, but where does one draw the line?  It is because of that penumbra of uncertainty that one is going to, in our submission, tie these words to the issue of acceptance of the risk.

KIRBY J:   But just pausing there, even if you do focus on acceptance of the risk and if the risk in question is the 30‑day extension, why is it not – you see, Mr Welsh was told, “Be careful”.  Now why was he told, “Be careful”?  He was careful and he felt uncomfortable about being careful.  So why is that not, even on the test of the risk of accepting the risk, relevant to whether or not the insurer would accept the risk and known to your client to be relevant and known to Mr Welsh explaining his discomfiture?

MR ELLICOTT:   Because it had nothing to do with the assessment or quantification of the risk as such, that is, the risk involved because the Permanent Company ‑ ‑ ‑

KIRBY J:   But the risk is whether ‑ ‑ ‑

MR ELLICOTT:   The risk is whether the Permanent Company would commit, through its officers, some negligent act in the 30 days and that is the physical and partly the moral hazard that is being insured.  This question of renewal had nothing to do with that, it did not affect it one bit.  It was a commercial consideration:  “You are not going to renew this and, therefore, I won’t grant you the extension”.  That is not relevant to the risk to say that, that is a commercial consideration; so that it is for that reason that we draw the line at that point.  Of course, when I said a moment ago hard cases make bad law, what the Court is considering on this issue is not the question of Mr Welsh or Mr Daly, one is considering, what do these words mean in this statute?

McHUGH J:   I have not had the advantage of reading all the evidence, but the finding that they would not have renewed for 30 days if they had been told strikes me as somewhat surprising.  I would have thought, given FAI’s problems with Sedgwick, they would have been doing everything they could to carry favour with Sedgwick.  To refuse the extension, on one view, might have been regarded as putting an end to the relationship.

MR ELLICOTT:   Yes.  Well, it is a hard test.

McHUGH J:   But, anyway, you are stuck with that finding of fact.

MR ELLICOTT:   It is a hard test when people are giving evidence years later and the claim is for something like $20 million to $30 million.

CALLINAN J:   He would say that, would he not?  But, Mr Ellicott, could I ask you this, I wonder if you could explain it to me.  Was there to be a charge of 20 per cent of the total premium for the one month’s extension?  Have I misunderstood that or is it ‑ ‑ ‑

MR ELLICOTT:   Yes, your Honour, there was the lead insurer in London and this is how it arose:  the lead insurer wanted further information about ‑ ‑ ‑

CALLINAN J:   I understand that.  What I am interested in is what the cost was going to be for the  ‑ ‑ ‑

McHUGH J:   It was 20 per cent pro rata, was it not?

MR ELLICOTT:   Yes.

CALLINAN J:   So that that strikes me as a high charge.  Am I wrong about that?  I would have thought eight and one third per cent, a 12^th might have been appropriate. 

MR ELLICOTT:   Yes.

CALLINAN J:   It looks rather like a super premium, but ‑ ‑ ‑

MR ELLICOTT:   Well, it is and it is one that is apparently normal in those circumstances.

CALLINAN J:   It just looks like an ordinary commercial transaction. 

MR ELLICOTT:   Yes.

CALLINAN J:   If you want an extension, you have to pay what would be otherwise the odds.

MR ELLICOTT:   What is the going rate.

CALLINAN J:   Pay over the odds, yes.

MR ELLICOTT:   There was no doubt that FAI indicated that they would accept the going rate and they did.

CALLINAN J:   That would be attractive for insurers to, I would have thought then, to effect brief extensions because that sort of charge is considerably more than they would get for a renewal for a year.

MR ELLICOTT:   Yes, and one, we would submit, has to be sceptical about evidence given some years later when faced with a large – but that was the evidence and the court ‑ ‑ ‑

CALLINAN J:   That was the finding.

MR ELLICOTT:    ‑ ‑ ‑ that was the finding, but there it is.

CALLINAN J:   But in any event, that 20 per cent really emphasises the naked commerciality of the arrangements.

MR ELLICOTT:   Yes, it does.

KIRBY J:   Yes, but there would not have been an arrangement, naked, commercial or otherwise, if you had revealed that you were playing the market.  You were in a sense suggesting you were going to go ahead business as usual, and that was the furthest thing from your mind.

MR ELLICOTT:   Your Honour, I do not mean this offensively, but ‑ ‑ ‑

KIRBY J:   Your best point is about the millions of Australians.  Your best point is that this Act has to work in a whole range of circumstances and you have to keep your eye on it.

MR ELLICOTT:   Yes, it is a very good one, your Honour.

KIRBY J:   I think that is a good point, but in this transaction, just confining ourselves to this, you were being duplicitous.

MR ELLICOTT:   Your Honour, I do not accept that, if I may say so, but I do not want to answer it now because I will be answering it later.

KIRBY J:   No, you will come to that on issue 5.

MR ELLICOTT:   I do not want to put the cart before the horse.  I have to get this horse going first in section 21 and it is driving the whole thing.  If we succeed on section 21, these other issues do not arise.  Your Honour will appreciate that under this Act – and perhaps I should make this clear – under section 26 misrepresentation only extends to a situation when it is a misrepresentation about a matter which the insured knew:

or a reasonable person . . . 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.

So that if it is a statement that falls within that, that is to say – I will read the whole subsection:

(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.

So that if we are right about this first issue, the construction, there is no room for misrepresentation under this Act which, as this Court has said, is a code.  Section 33 has to be borne in mind.  It says:

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

So that insurers can no longer make claims for misrepresentation about matters which lie outside those matters which are relevant to the question whether or not to accept the risk.

KIRBY J:   But is not that against you, given that there was a finding in this case that Mr Welsh was told, “Be careful”.  He was careful, he felt uncomfortable about it, and that rather indicates that he knew that that would have been a very relevant matter for the insurer to ‑ ‑ ‑.

MR ELLICOTT:   Be careful about a matter which, in our submission, has no relevance to the question whether or not to accept the risk.

KIRBY J:   Well, somebody thought it was relevant as to whether the extension would be granted.

MR ELLICOTT:   The evidence that was given by experts was to the effect that this particular matter was not relevant, in their opinion, to the question whether to accept the risk.  There was evidence given to that effect.  Mr Daly had that view, that it was not relevant to the question whether to accept the risk.  Therefore, they were in a territory where they did not have to disclose these matters, and it could not be a misrepresentation because 26 said so, if it was true, as they believed it to be, that this was a matter which was not relevant to the question of the acceptance of the risk.  Once this issue is decided in our favour, those other issues do not arise and it is neither fraud, nor misrepresentation, et cetera.  It is nothing.

GUMMOW J:   Mr Ellicott, section 33, is that to be read – on its face it is – as putting aside the Trade Practices Act, section 52?

MR ELLICOTT:   Your Honour, I think it is in Sutton on Insurance Law, and it seemed to me that there may be some strength in it, that this is only dealing with issues about misrepresentation, but on the other hand, if one is going to give a code effect to these provisions, then one might give those words a wider view, but there is an open question as to whether the Trade Practices Act is excluded for misleading and deceptive conduct.

GUMMOW J:   And there was no Trade Practices argument in this case?

MR ELLICOTT:   No, that argument was not in this case.

HAYNE J:   Now, apropos of the risk, Mr Ellicott, where do we most conveniently find the policy wording that applied in respect of the 30 day extension that was made?

MR ELLICOTT:   I will have to search for that, your Honour.

HAYNE J:   If at some point you could let me know where that is and could you at the same time let me know whether it was a claims made policy as distinct from an occurrence policy?

MR ELLICOTT:   I think it was a claims made policy.

HAYNE J:   Some of the wording I have seen seems to be claims made, in which case a view may be that either the risk or an element of the risk insured was the risk that a claim for professional negligence would be made within the period of the 30 days concerned.

MR ELLICOTT:   I understand that to be so, your Honour, but I will ‑ ‑ ‑

KIRBY J:   That is what in fact occurred, is not it, that within the 30 days the claims were made?

MR ELLICOTT:   Yes, the claim came up within the 30 days and that was it ‑ ‑ ‑

KIRBY J:   Was there a cover note, a written cover note of some kind issued?

MR ELLICOTT:   Volume 5, your Honour – could I answer – at 1160.  Yes, the claims made – I think it is in 1162, between 15 and 20: 

the Underwriters hereby agree to indemnify the Assured up to but not exceeding the sum stated in the Schedule for any sum or sums which the Assured may become legally liable to pay for breach of duty committed or alleged to have been committed in the professional conduct of their business, as stated in the Schedule arising from any claim or claims made against them during the Period of Insurance stated in the Schedule ‑ ‑ ‑

HAYNE J:   And is that then to be married to what appears at 1160 and 1161, which is the 30‑day ‑ ‑ ‑

MR ELLICOTT:   Yes, your Honour. 

HAYNE J:    ‑ ‑ ‑ time period? 

MR ELLICOTT:   I understand so.  That is Addendum (A), and that appears from the form on 1160 at line 13: 

“Follow Form” of primary wording (as expiring plus amendments as per Addendum A). 

HAYNE J:   Thank you. 

KIRBY J:   And the fax date indicates that that went out on 30 September, which was the last day of insurance. 

MR ELLICOTT:   Yes, that is right.  Now, I just wanted to illustrate, in as quick a way as I can, how the common law judges, if I can call them that ‑ and your Honours would be, in a sense, common law judges – but prior to this Act coming into force, how they phrased this issue.  Now, at page 7 of our submissions, we have, in note 46, Mayne Nickless, “accept the insurance”; Justice Glass in Barclay, “whether or not to accept the risk”; Acting Chief Justice Isaacs ‑

“whether . . . that fact would have influenced the company as a prudent insurer in fixing the premium or in determining to accept the risk” ‑

Brownlie v Campbell ‑

“may influence the underwriter’s opinion as to the risk he is incurring, and consequently as to whether he will take it, or what premium he will charge, if he does take it, you have to state what you know” ‑

over the page, section 24(2) of the Marine Insurance Act, what:

“a prudent insurer in fixing the premium, or determining whether he will take the risk.” 

HAYNE J:   Some of those are cast in subjective terms – see, for example, Brownlie v Campbell – some in objective terms. 

MR ELLICOTT:   Yes, I understand that.  Different wording was used to convey what we submit is basically the same idea, and the words “accept the risk” are just part of the phraseology of the common law.  They are not some special words adopted by the Law Reform Commission and recommended to the government for enactment, and then adopted by the government.  Both the Commission, in its report – and I will take your Honours to that – and the Attorney‑General, in his second reading speech, indicate that that is so, as does the explanatory memorandum, because they talk, not about acceptance – they talk about the assessment of the risk. 

KIRBY J:   The words “whether it will accept the risk” are apt to this case.  What you want to do is to say the focus must be upon the hazard of the insurance as distinct from the entirety of the factual circumstances.

MR ELLICOTT:   That is so.

KIRBY J:   Now, what is it in the Act ‑ ‑ ‑

MR ELLICOTT:   The only morality in it is the moral hazard of somebody having committed a crime or been guilty of arson or been rejected as a reliable insurance, for instance.

KIRBY J:   Where is the textual anchor for that more restricted view?

MR ELLICOTT:   In the words “accept the risk” because those ‑ ‑ ‑

McHUGH J:   Also 21(2)(a).

MR ELLICOTT:   Yes.

McHUGH J:   “Diminishes the risk”.

MR ELLICOTT:   Yes.  And (2)(a), as his Honour Justice McHugh has pointed out, talks about the “diminishes the risk” and says that that does not have to be disclosed, anything that diminishes the risk.  Well, you would think that was the counterpart of (1)(a).

McHUGH J:   It may be that if your argument is rejected then you would have to disclose to the insurer the fact that its premium is well below other offers that you have got from other insurers.

MR ELLICOTT:   Yes.

McHUGH J:   Unless the insurer can rely on 21(2)(c) that it is something in the ordinary course of its business it ought to know, although it might be hard to bring it within that.

MR ELLICOTT:   One can sit and think of other examples.  Once they go outside the risk then the possibility - they may be academic largely because in the ordinary world they do not occur very often, but it is the hard case that ‑ ‑ ‑

CALLINAN J:   Insurance companies must appreciate that people will be shopping around for better premiums.  It goes on all the time.  Indeed, it is encouraged by the ACCC.

MR ELLICOTT:   I thought it was the basis of our economy, your Honour.

CALLINAN J:   Yes.

KIRBY J:   Nobody is questioning that but it is whether, when you have, in a sense, made a provisional decision that because of various factors including the downgrading of FAI, that prima facie you are not going ahead with them.  You have to be careful how you deal with them.  “We want that 30 days.  We have left our run a bit late.  We have not got it lined up.  We’re just going to wait until we get the 30 days and by then we’ll give them the chopper”.

MR ELLICOTT:   Now the permanent company, as a result of this decision, if it is right, has to reveal forever and a day that it was found guilty of fraud.  Now, that is a very serious matter of course for the permanent company, and I will come to this issue of fraud ‑ ‑ ‑

KIRBY J:   That is your fifth point.

MR ELLICOTT:   But that only shows that here is a ‑ if you want to talk about hard fact, the hard fact here is that Sedgwicks, unbeknown to the permanent company, did what they did and yet the permanent company is supposed to be caught with it.  Then it is said that even though it has nothing to do with the risk in the sense that I am submitting, that forever and a day the permanent company has to disclose to insurers the results of these proceedings.  That is a pretty tough decision that has been exercised against it.  Right at the outset neither Mr Daly nor other people involved believed that they had to reveal this matter and therefore, a caveat emptor if you like so far as that was concerned.  The whole thing was a matter for the insurer outside that issue.  If they had asked a question and been misled, and it was not a matter that did come within 21(1)(a), then the question would arise, as Justice Gummow raised, as to whether Sedgwicks could be charged with misleading and deceptive conduct.  But that is a different matter, a different case; not this one.

KIRBY J:   Is your theory of the case that at that point where the extension was asked the insurer or the broker should have said, “By the way you are going to continue your insurance with us”?

MR ELLICOTT:   Yes.  It is not unusual for insurance not to be renewed. 

McHUGH J:   Well, it had been happening, apparently, quite regularly in the relationship between Sedgwick and FAI.

MR ELLICOTT:   Yes, and you would think if you were sitting in the chair in FAI in 1991 and your Standard and Poors rating was down to BBB, that your renewal might be in jeopardy and you would think you would be doing what you could to either find out or, alternatively, to please the insureds so that they would continue, not to go off into the distance.

HAYNE J:   Is the risk referred to in 21(1)(a) wholly identified by the insuring clause in the policy wording that ultimately applied?

MR ELLICOTT:   Your Honour is talking about the clause that I just read?

HAYNE J:   Just so.

MR ELLICOTT:   Yes, your Honour, yes.

HAYNE J:   Thus the field for debate on your argument is, what is a matter relevant to the decision whether to accept?

MR ELLICOTT:   Yes, that is right, and that the question of those claims is not affected in any way by the question of renewal, which was, of course, another contract.  Do your Honours have the Marine Insurance Act there of 1909?  I think it is sufficiently – and this has been said too in cases in England.  It was taken from the English Act of 1906.  It has been said to state the common law.  Every circumstance is material which would influence a judgment whether he will take the risk.

Now, I wanted to take your Honours to a case as a handy way of seeing how these matters were stated.  It is Pan Atlantic Insurance v Pine Top Limited [1995] 1 AC 501, a judgment of Lord Mustill in the House of Lords. Your Honours, this case was about whether the material matter had to affect the mind of the insurer or whether it was something the insurer would take into account, and it was a very large issue in England. It is no longer an issue under the Act, so this case is not strictly relevant. But if I could start at page 517 just to illustrate various ways in which these matters were said. Between C and D:

it is not unreasonable to expect that an assured who is aware of, and understands, his duty of disclosure should be able to identify those circumstances, within his knowledge, which would have an impact on the mind of the insurer when considering whether to accept the risk and, if so, on what terms he should do so –

Then 525E, if I may take your Honours to that, Lord Justice Stephenson:

‘which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk?’ . . . what I take to be the judge’s opinion that a circumstance taken into account by a prudent insurer in the process of considering the risk offered and the premium and the terms required . . . a hypothetical prudent insurer’s consideration of a risk, whether to accept it and on what terms . . . to accept a risk and on what terms –

Then on page 526D:

considering the proposed insurance with a view to deciding whether to take it up and on what terms, including premium.

At 527F:

After all, there may be many commercial reasons for still writing the risk on the same terms.

At 536F:

The assured is not to keep anything back which goes to the computation of the “contingent chance,” for otherwise there is no “fair representation,” and the underwriter is led to approach the “risk understood to be run” on a false basis.

At 537C:

“Every fact and circumstance . . . in determining whether he will underwrite the policy at all, or at what premium he will underwrite it, is material.”

Between D and E after Phillips:

“tending to influence [the underwriter’s] estimate of the character and degree of the risk to be insured against.” . . . to induce the underwriter more readily to assume the risk . . . “their probable influence on the estimated value of the risks.”

At 538D:

when assessing the risk (i.e. the “speculation”) which he was consenting to assume . . . That the word “risk” must be understood in the wider sense is now beyond dispute, but this has no bearing on the principle –

That is a reference to moral hazard.  I will take your Honours to that case of Ionides.

CALLINAN J:   Mr Ellicott, could I just ask you about a matter that has been puzzling me.  Justice Hayne put to you that the section contemplates an objective test and you accepted that.  Did both sides call evidence as to what an insurer would or would not do?

MR ELLICOTT:   Yes, there was evidence.

McHUGH J:   I think Justice Hayne put a subjective test.

HAYNE J:   What I was putting to you was that the case law spoke of an objective test, whereas this Act invites attention to “the insurer” rather than “a prudent insurer” or “an insurer”.

MR ELLICOTT:   Yes.

CALLINAN J:   I was looking at (b) actually, which speaks of “a reasonable person in the circumstances of the insured”.  So that seems to be objective but the other part is subjective.  I do not think it really alters the thrust of my question.  There seemed to be evidence called as to what an insurer might think, which might well be possible with a subjective test, but that seemed to have descended also to what an insured would also think.  There seems to be a lot of evidence.  Nobody objected to that.  It was called on both sides.

MR ELLICOTT:   But a reasonable person in some cases – this judgment not only dealt with this, but a lot of other issues – in some cases, the question of whether a reasonable person could be expected to regard it as relevant arose.  Justice Hodgson considered the evidence of experts in relation to that and it is ‑ ‑ ‑

CALLINAN J:   I am just questioning whether the expert evidence wandered, perhaps, beyond what the section contemplated were the issues.

MR ELLICOTT:   It could also be relevant to the other issues as to whether Daly was justified in thinking that it was not something that was relevant to the risk and that affected the state of mind, but that is quite another issue.

CALLINAN J:   Yes, all right.  I am sorry I interrupted you, Mr Ellicott.

MR ELLICOTT:   Your Honours, could I take your Honours to the Law Reform Commission Report.  In paragraph 183 – it is page 111 at the top and I think your Honours had a reference.

GUMMOW J:   What page, Mr Ellicott?

MR ELLICOTT:   Page 111, “Conclusion”, 183 is the paragraph.

GUMMOW J:   Thank you.

MR ELLICOTT:   It has 111 at the top right-hand corner.  This illustrates what the Commission was thinking about it:

The existing duty of disclosure is not justified by the principle of uberrima fides.  That principle would appear to suggest that an insurer should only be entitled to redress in the event of deliberate concealment or culpable indifference.  A former member of the Commission was firmly of this view.  However, the existing members are concerned that a rule based on concealment might give rise to unwarranted difficulties of proof and might conceivably make dishonesty more difficult to detect.  They therefore recommend that the duty of disclosure should be retained in modified form.  An insurer which wishes to rely on innocent non-disclosure should warn the insured of his duty of disclosure before the contract is entered into.  The duty should itself extend to facts which the insured knew, or which a reasonable person in the insured’s circumstances would have known, to be relevant to the insured’s assessment of the risk. 

That is how they saw it.

The substance of the test –

and they go on to speak about the English Law Reform Commission test.

McHUGH J:   Is that a mistake for “insurer’s”, “The duty should itself extend to”?

MR ELLICOTT:   Yes, your Honour, it is.  It should be “the insurer’s assessment of the risk”.  Over the page, that is made clear about perhaps 10 or 12 lines down:

An insurer should be entitled to redress for misrepresentations of a fact which the insured knew, or which a reasonable person in his circumstances ought to have known, to be relevant to the insurer’s assessment of the risk.

But that is how the Law Reform Commission looked at it and your Honours may not have it there, but the complete report has the draft in it.

KIRBY J:   Where is that second quote?  I just cannot pick it up.

MR ELLICOTT:   That is about, maybe 12 lines down on page 112.

KIRBY J:   Yes, I have it.

MR ELLICOTT:   And the words in the draft Bill, “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” is identical; (b) was different.  It read, “a person in the circumstances of the insured could reasonably be expected to know to be a matter so relevant”.  That was amended in the Parliament. 

Your Honours will have the Explanatory Memorandum – there are a couple of these but that is the one we have handed up.  Just before leaving the Law Reform Commission Report, knowing the thoroughness – I mean, this report took some six years, but it was thoroughly investigated and it was probably the most successful bit of law reform that has been done in terms of a Bill being recommended and substantially adopted.  One would have thought that the Law Reform Commission would have said something about the provision intending to depart from what we say is the common law position, and using those words “acceptance of the risk”.  The whole thrust was to say in the rest of that passage at 111 – I did not read it – “We want to protect the insured.  We want to cut it down and ameliorate” – I think is the word they used.

At page 40 of this Explanatory Memorandum – sorry, we should start earlier, page 34, clause 21, “The insured’s duty of disclosure”:

Present Law – An insured is required to disclose to the insurer all material facts relating to the insurance he proposes to effect and which are material to the insurer’s assessment of the risk he is incurring or as to the premium he should charge.

And in paragraph 61 over the page:

Proposed Law . . . which he knows or which a reasonable person in the circumstances could be expected to know –

and that quotes the section.  Then down the bottom in paragraph 62, fifth line up:

Rationale – Clause 21 mitigates the application of the duty by providing that the insured’s duty is only to disclose those facts which he knew or a reasonable person in the circumstances would have known to be relevant to the insurer’s assessment of the risk.  As an examination of –

and it goes on to deal with what is in (b), and on page 40, dealing with misrepresentation:

The question of materiality ‑ ‑ ‑

KIRBY J:   But the problem is the section itself does not use those words.  I could understand the power of assessment and I take the point that you are making both from the Law Reform Report and the Explanatory Memorandum, but instead it uses “whether to accept the risk”.

MR ELLICOTT:   Yes.  Now, we answer that by simply saying that is Pegler and Pegler means assessing the risk.  It is just another way of saying the same thing and that is why they say that.  In this passage I am about to read, page 40, the Attorney‑General or the officers use a different term:

The question of materiality is determined by reference to what the prudent insurer would have regarded as material in the circumstances . . . ie as influencing his judgment in fixing the premium or determining the risk it will take.

They then pick up other notions and they are all, we say, covered by the same intent and that is to fix on the risk and ask the question, “Does this affect the assessment of the risk?”.

Now, I have already submitted to your Honours that if this test was adopted, as Justice Handley suggested, then it would make it, I would submit, very cumbersome for individual insureds and insurers would be probably employing a lot more investigators to find out what people may have known, which were not revealed, so that they could escape their insurance.  But be that as it may, I was submitting that one can think of these things, think of instances of matters that might have to be revealed.  If a particular insurance company has a stated policy that it will not insure tobacco companies, does an insured, in seeking an insurance, have to reveal that he or she has a large number of shares in Philip Morris or some shares in Philip Morris?  Where does it begin and where does it end?  It raises a very difficult issue, whereas the question of physical and moral hazard has, over the centuries, been looked at and is a well-worn path.

Your Honours, there is a case which we say has some teeth in it in terms of the question whether or not this has ever happened before or this question has been considered.  It is Barclay’s Case (1987) 8 NSWLR 515. It is not exactly the same thing because, in this case, there had been a – and your Honour Justice Kirby may remember it – refusal to renew, and the question was whether that refusal to renew should have been revealed. The decision was that it was not a material matter to reveal. This is not under the Act, although it is 1987; this is an old pre-Act policy.

Your Honour Justice Kirby at 516 said, just below B:

Sometimes legislation has attempted to modify the test, usually to soften its obligation.

And your Honour, no doubt with some pride, referred to the Insurance Contracts Act 1984.  But your Honour concluded at 520C:

And the expression of the principle to be applied as stated by Justice Samuels in Mayne Nickless Ltd v Pegler, clarified by this appeal, is to be most preferred.  Its endorcement by the Privy Council reinforces, even if it does not bind us in, this view.

Now at E – and I do have to take your Honours a little way into the facts:

The following matters were established by the evidence.  The plaintiff company was beneficially owned and controlled by one Miles Barclay.  In 1982 Mr Barclay owned commercial office premises at Blacktown which were insured with the MLC Fire & General Insurance Co Pty Ltd.  On 9 March 1982m, the premises were damaged by fire and a claim was made on the MLC policy.  On 7 June 1982, a manager of the MLC wrote to Mr Barclay regretting that the company would be unable to invite renewal of his insurance from its expiry date.  On 9 August 1982, the general manager of MLC wrote to Mr Barclay withdrawing the previous letter.  The author of the first letter gave evidence at the trial that the original decision not to invite renewal was not based on questions of moral hazard but was a commercial decision based on administrative considerations.  As it happened Mr Barclay had taken out insurance elsewhere in the period between the two letters.  The author of the first letter also gave evidence that an investigation of the Revesby fire did not disclose any physical or moral hazard.

Mr Gyles asked some questions and they appear at 521F:

Q.  I think in addition to that I would like you to assume, if you would, that the invitation from MLC to not just Mr Barclay but to the others to whom it was addressed . . . A.  Yes.

Q.  That that was for commercial administrative reasons and not for any reason of moral hazard?  A.  Yes.

And a couple of questions down:

Q.  On those assumptions in your experience were the matters my learned friend put to that witness in your view matters which would be material to the risk which was here proposed?

Q.  His Honour:  Assuming those assumptions with all the other assumptions put to you?  A.  With the additional assumptions I would not regard those things as material.

There is further evidence that is set out there, but that was the state of the evidence.  Then at 522 just above F:

The trial judge directed himself according to the definition of materiality propounded by Samuels J ‑

and that is set out ‑

The word “reasonably” is necessary to maintain control over the evidence and possibly absurdly stringent insurance practice ‑

Then there is a reference to “container transport” and then on 523F:

The outcome of the appeal depends in my view on the application of the Mayne Nickless Ltd v Pegler test to the evidence.  Before reaching that stage of the adjudication, however, there is a second principle of law which must be considered and determined.  The question may be expressed in the following manner.  Does the Court apply the test of materiality to the two isolated facts viz the previous fire and the refusal to renew or is it to be applied to those undisclosed facts located in the web of surrounding circumstances which explain their true significance?

He goes on to say that you look at it in the circumstances.  On page 525 appears under A:

The Western Australian Insurance Co Ltd v Dayton approach is in my view consistent with the nature of the uberrimae fidei duty which the proponent owes to the insurer to whom the proposal is made.  This is traditionally described as a duty to disclose all facts material to the appraisal of the risk ‑

so that is how the duty is complied with ‑

which are known to the former but not known to the latter.  If the previous loss when fully examined occurred in circumstances where no blame could attach to the proponent, it could not affect the risk and would not be a material fact.

Then there is a reference to Mayne Nickless and Western Australian Insurance.  Then, against D:

When the Mayne Nickless Ltd v Pegler test of materiality and the Western Australian Insurance Co Ltd v Dayton concept of undisclosed matters are applied to the evidence in the appeal, the answer in my opinion is not open to doubt.  The two experts agree that a fire which on investigation discloses no physical or moral hazard is not a material matter which the proponent is bound to disclose.  The identical conclusion is yielded by the application of principle to the facts . . . Such a letter could imply a recognition of a physical or moral hazard and as such would be material.  But when fully examined it was based on no such considerations whatsoever.  It was shown to be a reaction to a client whose attitude had caused unusual delay and expense in the processing of the claim.  Such considerations cannot in my view bear upon the risk in question and are not material to its appraisal.  In any event the prima facie implications of the letter standing alone were negated when it was withdrawn.

I want to go to the judgment of Justice Priestley because it really sums up in a way what I am trying to put.

There, the question of renewal was held not to be a matter material to the risk.  Now, it is not quite the same, but it is very close, in our submission.  Justice Priestley refers to Hodgson v Richardson; he agrees with Justice Glass; and then he says: 

There was in the course of this appeal considerable argument about the meaning of materiality in connection with the facts to be disclosed to an insurer.  A review of the authorities shows that the underlying idea has been the same at least since Lord Mansfield’s time.  Two years after Hodgson v Richardson Lord Mansfield repeated the idea in a little more detail (see Carter v Boehm (1766) 1 Wm Bl 593 at 593-594; 96 ER 342 at 343):

“Insurance is a contract on speculation:  the special facts usually lie in the knowledge of the insured only.  The underwriter trusts to him, that he conceals nothing, so as to make him form a wrong estimate.  If a concealment happens without any fraudulent intention by mistake of the principal or his agent, still the policy is void, because the risk, which is run, is not that which the underwriter intended.” 

The idea has been restated –

in the Act –

The most pertinent local example is that of Samuels J in Mayne Nickless v Pegler [1974] 1 NSWLR 228, which is set out in Glass JA’s reasons. This accurately embodies the idea upon which all the cases have proceeded, in England and Australia. The fact that the idea was accurately expressed in Mayne Nickless Ltd v Pegler does not mean that the words there used are the only way in which the idea can be stated.  From Lord Mansfield’s time until now the same thought has been expressed in different (although often substantially similar) ways.  No one form of expression can crowd all others out of the field.  Further, the meaning of the later ways of expression in the series can most readily be grasped if the earlier versions are kept in mind.  Thus it was by reference to the idea expressed in the Mayne Nickless Ltd v Pegler formulation, understood in the light of the many earlier expressions of it, that the present case was, in my opinion, to be decided. 

And he agrees with the analysis.  That does sum up what we would want to say about the common law and the word “acceptance” and how it was just one of a number of ways of saying the same thing.  Your Honours, there are a couple of cases I need to go to.  The first one is Tate v Hyslop ‑ ‑ ‑

McHUGH J:   For what proposition, Mr Ellicott?  Why are you taking us to this? 

MR ELLICOTT:   I am taking your Honour to it to just see how the common law dealt with materiality.  This is one case that my friend might rely on, and I just want to flick it aside, if I can. 

HAYNE J:   We will measure the argument in nanoseconds, will we then, Mr Ellicott? 

MR ELLICOTT:   This was a case where the right of subrogation of the insurer was, in effect, put aside by an arrangement between an insured and a third party.  Now, the insurer said that should have been disclosed.  The judgment will show ‑ the Master of the Rolls, Brett ‑ that although in that case it was held to be material, if it were not for one singular fact, it would not have been material.  That is to say, that the underwriters had announced that they would charge higher or lower premiums depending upon whether or not the right of subrogation, in effect, had been put aside and it was held that they having said that and made it public and that being known to the insured, then it was material to the risk and what it did, in effect, was it affected the total of the economic loss which would be suffered but the case itself, we say, is an exception. 

McHUGH J:   It seems fairly removed from this case.  If your opponent relies on it, you can deal with it in reply.

MR ELLICOTT:   I beg your Honour’s pardon.

GUMMOW J:   Section 28(3), is it not?

MR JACKSON:   I am sorry, your Honour.

McHUGH J:   Section 28(2), “may avoid the contract”.

MR JACKSON:   Yes.

GUMMOW J:   I understand that.

MR JACKSON:   Your Honour, I think we may be at cross‑purposes.

GUMMOW J:   How did the trial judge come up with 2,400?

MR JACKSON:   I do not think he did, your Honour.

KIRBY J:   Not having found fraud, the trial judge did not set aside the contract and did not order the repayment of the premium and you cross‑appealed.

MR JACKSON:   We cross‑appealed and got that on the fraud, because of the success in the fraud.

GUMMOW J:   So we are debating $4,242.

MR JACKSON:   Yes, your Honour.  It is a wild sum.

KIRBY J:   So it is orders 3 and 4, 3 allowing cross‑appeal and 4 ordering the repayment of the premium.

MR JACKSON:   Yes.  Your Honour, may I go to issue 2.  This concerns of course the meaning of the term “knows” in paragraph (a) of section 21(1).  Your Honours, that term is a term of course to be construed in its context, and the context has a number of relevant aspects.  One is the assumption, which appears from the earlier part of section 21(1), that the matter is “known”.  The second aspect of it of course is that the matter will not be something in the abstract; it will be something that has a nature.  The question which then arises is whether the insured – and I leave aside for the moment the question of who might be the insured relevantly, that is issue 3 – knows it to be relevant to the decision of the insurer.

Your Honours, in many and indeed probably most cases there will be little difference between knowledge and belief.  If the matter is relevant and the insured believes it to be relevant, that usually will be sufficient.  Your Honours, to use the term “belief” as if there is necessarily something different from knowledge involved in the term “belief”, does obscure the question a little.  There are other terms which can, in particular contexts, particular factual situations, describe the relevant state of mind.  If one uses, for example, the word “understands”; if one understands it to be a matter relevant to the decision of the insurer and, your Honours, various states of mind which might, in relevant context, amount to knowledge, were referred to in the passage in Vines v Djordjevitch, to which my learned friend referred this morning.

But if one turns to the evidence for a moment, the trial judge’s finding in volume 1 at page 175 in one of the red books line 46, was, in our submission, amply justified, where he found, your Honours, that the evidence justified the conclusion and Mr Daly and Mr Welsh believed that if they had disclosed to FAI the matters referred to in section 9(2), it was likely that the 30‑day extension would not have been granted.  Now, your Honours, the evidence in relation to that can be seen, and if I could take your Honours very quickly to the most relevant passages in volume 1 of the blue books at page 146, line 7, he was asked:

Q.  Accepting that for a moment, Mr Daly, as a fact asserted by you, does it not remain the fact that when you left for Brisbane, you knew that if Mr Welsh conformed to what you wanted him to do –

could I pause to say the word “knew” is there, your Honours –

namely refrain from volunteering the piece of information, he, Mr Welsh, would be withholding from Mr Hunter a piece of information relevant to Mr Hunter’s consideration of whether he would grant the extension and, if so, on what terms?

A.  Yes.

So he ‑ a question framed in terms of knowing, he answered yes.  At page 142, going back a few pages, line 37:

Q.  You had decided, had you not, that you didn’t want Mr Hunter to know specifically that he was not being invited to participate, didn’t you?

A.  I didn’t think it was going to achieve anything if that information was provided.

Q.  It went further than that, did it not, Mr Daly?  You thought that if that information was provided, it was very likely that you wouldn’t get an extension from Mr Hunter at all?

A.  There was that possibility, yes.

Q.  You thought it was very likely, did you not?

A.  It was a type of reaction that I would have expected from Stephen Hunter and other underwriters at FAI at that time.

Q.  But is the answer to my question that you thought that if you told

Mr Hunter, or anybody told Mr Hunter, that FAI was not being invited to participate, it was likely that he would not agree to a 30 day extension?

A.  It was likely, yes.

Your Honours, then if one goes finally to page 144 in relation to Mr Daly, line 30, and it is the passage that goes through to page 145 line 34 and it concludes on page 145 at line 29:

It was a piece of information of a kind which you have agreed with me, have you not, earlier this afternoon, was relevant to consideration by an underwriter in the Australian market for professional indemnity insurance in his consideration of whether he would grant an extension or, if so, on what terms?
A.   Yes.

Now, your Honours, those answers were obviously accepted by the judge and they went directly to that issue.  Then Mr Welsh’s evidence, your Honours, to the same effect.  May I simply give your Honours the references in that regard without taking your Honours to the particular passages.  It is in volume 3 of the blue volumes, page 560 line 10 to line 34, and then – it is a lengthy passage your Honours have already been taken to – page 591 commencing at line 28 going through to page 591A line 27.

Your Honours, our submission is on this point, issue 2, that the tests adopted by the trial judge and by the Court of Appeal were correct.  Could I

refer your Honours to the passage from Justice Hodgson quoted in the Court of Appeal’s reasons at paragraphs 40 to 43 and also by Justice Handley himself in paragraph 54 of the same reasons where he said:

The belief of Messrs Daly and Welsh in the likely attitude of FAI was held with sufficient assurance for both of them to conduct themselves in a business transaction as if it were true.  When a person, on the basis of some information, holds a belief on which that person is prepared to act in the world of practical affairs, he or she knows that fact for most legal purposes, and certainly for the purposes of s 21 –

et cetera.

Your Honours, if one stands back from the detail of the evidence in a case like this, if one looks at a situation where professional brokers say nothing about a particular matter because they know that the result is likely to be that the extension for a month of the insurance they are seeking will not be granted, it is very difficult to say that their understanding that that is the real possibility should not be treated as knowledge in the context of section 21(1)(a) whether one regards the appropriate synonym as being understanding or belief it is, in relevant terms, knowledge.  One is, after all, applying section 21(1)(a) in a context which does have a commercial aspect.

Your Honours, that is what we would want to say about the second issue.  Could I refer particularly as well to our written submissions in paragraphs 25 to 27 and also paragraph 32.  That brings me to the third issue, I see the time.

McHUGH J:   Yes, how long will be, Mr Jackson?

MR JACKSON:   Your Honour, I would be about 20 minutes to half an hour, I think.

McHUGH J:   Yes, we will adjourn until 10 o’clock in the morning.

AT 4.14 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 9 OCTOBER 2002