Pilmer & Ors v HIH Casualty & General Ins & Ors No. Scgrg-00-25

PILMER & ORS v H.I.H. CASUALTY & GENERAL INSURANCE LTD & WILLIS CORROON PROFESSIONAL SERVICES LIMITED
[2000] SASC 299
Civil
MULLIGHAN J
Background

The plaintiffs, with the exception of Pamela Anne Robinson, with the late Geoffrey James Stokes, carried on practice in partnership, as accountants under the name of Nelson Wheeler Perth, including in 1987 and 1988. Ms Robinson is the executor of the estate of the late Mr Stokes. I shall refer to the plaintiffs as “Nelson Wheeler Perth”.
They were the defendants in an action brought against them, and others, in this Court in 1992, by Duke Group Limited (In Liquidation) (“Duke Group”) for damages for breach of contract and in tort arising out of a report prepared by them pursuant to the Main Board Listing Rules of the Australian Stock Exchange in the context of the acquisition by the predecessor of Duke Group of the shares in a related company. The action came to trial in 1994, 1995, 1996 and 1997. I was the trial Judge. The causes of action in contract and tort were established and judgment was entered against them on 30^th January 1998 for the sum of $93,863,769.81, including interest: see Duke Group Ltd (In Liq) v Pilmer & Ors (1998) 144 FLR 1 [27 ACSR 1; 16 ACLC 567]. During the trial, Duke Group sought damages against Nelson Wheeler Perth for breach of fiduciary duty in relation to the giving of the report. On appeal, the Full Court of this Court increased that amount to $117,073,842.91: see Duke Group Ltd (In Liq) v Pilmer & Ors (1999) 73 SASR 64. The Full Court found the additional basis of liability, namely breach of fiduciary duty although I had not done so, but that is a matter of no consequence in the present proceedings. I shall refer to that action as “the Duke action”.
The events which gave rise to the liability of Nelson Wheeler for the damages occurred mainly in 1987. At that time, there were other firms of accountants carrying on practice under the name of Nelson Wheeler in Adelaide, Melbourne, Sydney and Surfer’s Paradise. The arrangements between all of those firms or their members were held by the Full Court not to constitute a partnership. However, the arrangements included the obtaining of common professional indemnity insurance which covered all of the members of the various Nelson Wheeler firms.
Late in 1989 the composition of Nelson Wheeler Perth changed. It is unnecessary for present purposes to set out the detail of the changes. It is sufficient to say that in 1991 some of the plaintiffs remained in the Perth partnership but, as a result of mergers, the name of the firm became BDO Nelson Parkhill (“BDO”) in 1990. That firm continued to be part of the national arrangements of the same nature.
At relevant times, the first defendant, HIH Casualty and General Insurance Limited (“HIH”), a company incorporated in the Australian Capital Territory, carried on business as an insurer and underwriter and was an insurer of BDO in respect of professional indemnity pursuant to contracts of insurance which are mentioned shortly. HIH was formerly known as CE Heath. In these reasons references to CE Health and HIH are to the same company.
The second defendant, Willis Corroon Professional Services Limited, a company incorporated in the State of New South Wales, was, at material times, the agent of Willis Corroon Limited (“Willis Corroon”). Willis Corroon carried on business as an insurance broker. HIH and Willis Corroon were, at material times, trading corporations formed within the limits of the Commonwealth of Australia.
Prior to the year commencing on 1^st July 1991, the BDO firms in Perth, Adelaide and Sydney had professional indemnity insurance to a limit of $20m. They had an association with a group of firms of accountants in other countries known as BDO Binder (“BDO International”). Mr Wenham was a senior partner of BDO in Sydney and for some years was the chairman of the national association which he represented at meetings of BDO International. Following the suggestion of BDO International, the national executive of BDO decided to increase its professional indemnity cover to $50m. Previously, an insurance broker, Marsh & McLennan Limited, had undertaken the placement of professional indemnity insurance for BDO through American Home Assurance Company. Willis Corroon secured the business as the broker for BDO in lieu of Marsh & McLennan Limited.
Cover was arranged in two stages and on the case of BDO and Willis Corroon, in three layers. Willis Corroon acted at all relevant times as the broker and, in that context, was the agent of BDO. It is necessary, in due course, to consider what happened in detail but at this stage of the narrative, it is sufficient to say that Willis Corroon placed the first, primary layer of $10m with HIH and the second, first excess, layer of $10m with Government Insurance Office (“GIO”) in July 1991 for the period from 1^st July 1991 to 30^th June 1992. There was difficulty in placing the third or second excess, layer of $30m. Eventually 76 per cent of that layer was placed with Lloyds and underwriters in the London market and that cover was for the period from 1^st September 1991 to 30^th June 1992. There is no dispute about those matters.
A dispute has arisen with respect to the remaining 24 per cent of the second excess layer which is $7.2m.
The case of Nelson Wheeler Perth and Willis Corroon is that HIH did accept that percentage of the second excess layer, and that 7.5 per cent of that risk, about $2.25m, was re-insured by Southern Cross Underwriting Pty Ltd (“Southern Cross”). HIH denies that it accepted any part of the second excess layer. Southern Cross acknowledges that it accepted that re-insurance but is not liable to Nelson Wheeler Perth unless HIH is found to have accepted the risk.
Execution of the judgment against Nelson Wheeler Perth was stayed pending the hearing of the appeal to the Full Court. After judgment was given by the Full Court, Nelson Wheeler Perth sought special leave to appeal to the High Court. Special leave was granted only on one aspect of the judgment regarding assessment of damages. In consequence, even if Nelson Wheeler Perth are wholly successful in the appeal to the High Court, they will have to pay about $33.8m and a considerable amount of costs to Duke Group. In the High Court, McHugh J ordered a stay of execution of that part of the judgment in excess of $31,737,464.87 and post judgment interest upon specified conditions which are not relevant to issues now to be decided.
G.I.O. and the underwriters at Lloyds have accepted the obligations of indemnity under the contracts of insurance relating to them and have discharged those obligations having entered into arrangements with Duke Group. HIH has accepted, and discharged, its obligation under the contract of insurance relating to the primary layer by payment of $10m to the liquidator of the Duke Group, except that it does not accept an aspect of the interpretation of that contract of insurance. The policy provides that in addition to the obligation to indemnify BDO with respect to any claim within the limit of the policy, HIH must pay the costs and expenses incurred, with its consent, in the defence or settlement of any claim. This obligation is subject to the proviso that if a payment in excess of the amount of the indemnity available has to be made to dispose of the claim, the liability of HIH for such costs and expenses shall be such proportion thereof as the amount of indemnity available bears to the amount paid to dispose of the claim. HIH paid about $18.5m to defend the claim and now seeks $14,796,616.00 from the Nelson Wheeler Perth by way of recovery of the proportion of the costs paid which, it says, they are obliged to pay. This claim is denied by Nelson Wheeler Perth and is pursued by HIH by counterclaim in these proceedings. The counterclaim raises different issues from whether HIH accepted part of the second excess layer of the cover and I directed that it be heard at a later time.
The Relief Sought
Nelson Wheeler Perth bring this action for an order for specific performance of the contract of insurance which they say exists between them and HIH for 24 per cent of the second excess layer or, alternatively, for payment of $7.2m pursuant to the contract. They also seek damages for failure or refusal to pay the indemnity claimed and contribution for the costs of their defence in the Duke action in relation to its share of the second excess layer of the cover, interest pursuant to s57 of the Insurance Contracts Act 1984 (Cth) from about the middle of 1999, and costs of their application for a stay of enforcement of the judgment in the Duke action against them on an indemnity basis. Nelson Wheeler Perth also seek their costs of this action on an indemnity basis.
Nelson Wheeler Perth’s action against Willis Corroon is largely, but not entirely, in the alternative to the claims against HIH. Apart from in one respect, it is only maintainable if those claims fail, it being held that HIH did not participate in the second excess layer of insurance as alleged. In the event that it is found that no such policy of insurance was entered into by HIH and there is no other basis for an award of damages against them, Nelson Wheeler Perth bring this action against Willis Corroon.
Nelson Wheeler Perth allege that there was a contract of retainer between them and Willis Corroon, terms of which included that Willis Corroon would procure for their benefit professional indemnity insurance to a limit of $50m, together with defence costs for the relevant period. They further allege that it was an implied term of that contract that Willis Corroon would procure, and provide to them, conclusive evidence of the existence of an enforceable contract of insurance with reputable insurers having the means to provide the indemnity. They allege other implied terms which need not now be mentioned. Nelson Wheeler Perth allege that Willis Corroon are in breach of this contract and that it failed to deal with them reasonably and in good faith. In the alternative, they bring an action in negligence alleging that Willis Corroon, by reason of their undertaking to them to procure the professional indemnity insurance cover and defence costs, owed to them a duty to exercise all reasonable skill, care and diligence to procure such cover and to produce evidence of the cover and were in breach of that duty. They seek damages for breach of contract and negligence. Also, they bring an action against Willis Corroon pursuant to s52 of the Trade Practices Act 1974 (Cth) or s42 of the Fair Trading Act 1987 (NSW) or s56 of the Fair Trading Act 1987 (SA), it being alleged that it engaged in conduct in trade or commerce that was misleading or deceptive. These claims are particularised as the 24 per cent of the second excess layer including any pro-rata contribution to the costs of the defence in the Duke action, their costs of the application on 7^th December 1999 for a stay of the execution of that part of the judgment in the Duke action in excess of the stay granted by McHugh J, the cost and expense of prosecuting this action against HIH to the extent of the difference (if any) between costs recoverable pursuant to an order for costs in this action and Nelson Wheeler’s costs between solicitor and own client. The claim for costs is simply made on the basis that if Willis Corroon had discharged its legal obligations to BDO which includes members of Nelson Wheeler Perth, those proceedings and various applications would not have been brought and the consequential costs not incurred by Nelson Wheeler Perth.
HIH and Willis Corroon each deny the causes of action and claims made against them respectively. In addition, Willis Corroon assert that the claims in so far as they are founded in contract or tort are barred by the Limitation Act 1969 (NSW) or, alternatively, the Limitation of Actions Act 1936 (SA). The claims based on the Trade Practices Act are barred by s74J of that Act and the claims based on the Fair Trading Act are barred by s84 of that Act.
Nelson Wheeler Perth contest those allegations of limitation, including that the relevant limitation law regarding the claims in contract and tort is the New South Wales legislation. In the alternative, should it be decided that this action was brought out of time, they seek an extension of time to commence the action pursuant to s48 of the Limitation of Actions Act (SA).
At the time the relevant insurance arrangements were made, or not made as the case may be, only three members of Nelson Wheeler Perth were members of BDO, namely Mr Martino, Mr Messer and Mr Munachen. Mr Stokes and Mr Pilmer left Nelson Wheeler Perth in October 1989. Mr Gray and Mr Crawford left the firm subsequently but before 1991. These former members of Nelson Wheeler Perth have the same causes of action against HIH, or alternatively Willis Corroon, although no policy document was issued by HIH with respect to the second excess layer of cover. If the cover was accepted it would be on the same terms and conditions as the primary layer. HIH issued a policy for that layer on 25^th September 1991 which operated retroactively. The policy included what has been called “run off” cover for retired members of BDO which includes these plaintiffs. It may be described as a “claims made” policy which required the claim to be made during the period of the insurance. It is not disputed that the claim was made during June 1992 which was during the period of the cover at all layers.
Without the indemnity which they say HIH accepted under the second excess layer of insurance, Nelson Wheeler Perth are unable to pay the amount of the judgment which is not the subject of the stay ordered by the High Court. If they are successful in the appeal to the High Court and in establishing these causes of action against HIH or Willis Corroon, it is possible that they may be indemnified against all amounts due by them to the Duke Group. If so, enforcement proceedings against them will be unnecessary. For that reason, I granted a stay of execution of that part of the judgment not the subject of the stay ordered by the High Court until, in effect, judgment in this action and ordered that the action be heard as a matter of urgency. All parties have facilitated the early trial and it is appropriate to acknowledge the considerable efforts of their counsel and solicitors to enable the trial to be concluded expeditiously.
The Witnesses
Before considering the issues in these proceedings, it is appropriate to say something about the evidence and the witnesses. The relevant events occurred nearly nine years ago. Documents were brought into existence by BDO, HIH, Willis Corroon and others which reveal much of what happened. Some of these documents refresh the memory of some witnesses about some matters but as is to be expected, witnesses as to what transpired between HIH and Willis Corroon do not have complete memory of significant matters. However, they are able to explain the significance of important documents and the office practices and procedures of their employers.
With the exception of some witnesses to whom specific reference is made later, I found all of the witnesses to be truthful and to have done their best to assist the Court. It is not always easy to differentiate between true recollection and reconstruction, but nearly all of the witnesses made it clear whether they were recounting events from memory or reconstructing what is likely to have occurred from office practices and documents admitted into evidence. The evidence of the witnesses, whilst truthful, is not necessarily accurate due to the passage of time. However, upon consideration of all of the evidence, a reasonably clear picture of what happened has emerged and it has been possible to resolve facts in issue.
The two key witnesses are Mr Brown, the managing director of the profession indemnity insurance division of HIH and Mr Ellison, the managing director of Willis Corroon. Both men held those positions at all material times and have extensive experience in the insurance industry. Brown has been employed in the insurance industry since 1965 and has extensive experience in underwriting professional indemnity insurance in England and Australia in his own business and for major underwriting companies. Brown joined HIH when, under the previous name of CE Heath, it commenced a professional indemnity section in 1982. He was appointed the manager of that section. Since then claims for professional indemnity have also been his responsibility. In 1991, according to Brown, HIH held about 35 per cent of the professional indemnity market in Australia and was the single largest insurer with about 2,200 stand alone policies and about another 3000 policies written on various schemes. He had about 16 staff. There is no reason not to accept this evidence.
Ellison also had extensive experience in the insurance industry since 1976 and as a manager of large firms of insurance brokers since 1985. He joined Willis Corroon in late 1985 as managing director. At all material times Willis Corroon was a specialist professional indemnity insurance broker.
Brown and Ellison had known each other since probably 1978, although Brown said that their association commenced at a later time. By the time of the events which are the subject of this action, the two men had a close working relationship. I accept the evidence of Ellison and Ms Thompson, an employee of Willis Corroon, that Brown and Ellison spoke to each other daily most of the time. They transacted a great deal of business together through their respective companies with Ellison as the broker and Brown as the underwriter. They played golf together once a week and occasionally had lunch together. Ellison placed a significant proportion of the business of Willis Corroon for professional indemnity insurance with HIH.
The evidence of Brown and Ellison is in conflict and is critical to resolution of the primary issue as to whether HIH accepted participation in the second excess layer. Brown said that HIH did not accept the risk. Ellison said, in effect, that it did. Whilst I formed firm impressions about each of them in the witness box, it is necessary to consider all of the evidence before reaching any favourable or unfavourable views about their credibility. I shall return to the conflict in their evidence and my conclusions about them in due course.
Nelson Wheeler Perth called Mr Martino, Mr Grellman and Mr Hoffman. I found all of them to be truthful and reliable witnesses. Martino is one of the plaintiffs. He was a member of Nelson Wheeler Perth and of BDO in 1990 and 1991 when the professional indemnity insurance was negotiated by Willis Corroon for BDO. My finding about his credibility should not be regarded as inconsistent with my findings in the Duke action. Martino’s evidence in the present case is supported by other evidence and reflects the likely course of events. Grellman is a chartered accountant and a consultant to BDO. He was a member of that firm until 30^th June 1991. For many years he had been a member of Nelson Wheeler Sydney. From the early 1970’s until about April 1992, he was responsible for arranging, negotiating and effecting professional indemnity insurance for the various Nelson Wheeler firms and later BDO nationally. He was closely involved in arranging the cover in 1991.
Hoffman has extensive experience in the insurance broking industry. He commenced working as a broker in 1952 and continues to be involved as a lecturer, consultant and a member of a government panel, the name of which in an abbreviated form is the General Insurance Claims Review Panel. He has held positions of responsibility in associations connected with insurance and insurance brokers. He has considerable experience in the placement of professional indemnity insurance in both the Australian and London markets. He has been an underwriting member of Lloyds of London and was involved in the placing of insurance by major brokers. He has given expert evidence in courts in most of the States of Australia. It is unnecessary to set out the details of his experience and expertise. I accept his evidence. I regard him as an expert in insurance matters of the type relevant to issues in these proceedings. I found him to be knowledgeable and reliable and his evidence has been of some assistance in resolving matters in issue although I think much of his evidence was about prudent insurance practices which are obvious enough. I refer to aspects of his evidence later when considering particular issues.

I accepted the evidence of the various witnesses called by HIH and Willis Corroon except where I indicate to the contrary.
During the course of the trial, there was a considerable body of both oral and documentary evidence placed before the Court and extensive submissions by counsel. I do not propose to mention all of the evidence or submissions as to do so would result in these reasons being of even greater length. However, I have considered all of the evidence and the submissions, including that which I have not mentioned.
Before embarking upon what transpired in relation to the professional indemnity insurance for BDO in the 1991/1992 year, it is convenient to mention aspects of the evidence of Hoffman. It was the practice in the insurance industry at materials times for substantial professional indemnity cover for accountancy practices to be arranged through major international brokers. It will be seen that Willis Corroon attempted to place most of the second excess layer through its London parent. A broker with experience in the placement of this type of insurance to the extent of cover of $30m in a second excess layer would prepare a “quotation slip” providing adequate information on all matters disclosed to the underlying insurers at last renewal as well as details of the underlying cover. Often the broker will indicate the premium which it believes is adequate for the placement. It is likely that, in 1991, the broker would send the quotation slip to its London office for quotes to be obtained at the Lloyds and the London company market. The London broker would “show” the quotation slip to an underwriter whom it knew was an acceptable lead in the market. If that underwriter indicated that it would write a substantial line at the premium offered, the underwriter would sign and indicate its percentage on the slip. Eventually the London broker would indicate to the Australian broker that it could quote that premium to the proposed insured.
Upon a firm order being given, the broker would immediately advise its London office that an order had been given at the quoted price and the London broker would convert the quotation slip into a “placing slip”. The underwriter who indicated interest would then sign its promised line. The broker would then show the slip to such other underwriters whom she knows might be interested in participating. When the total amount of the second excess layer is placed, the London broker will have a slip signed by each participating underwriter, showing the percentage accepted by each participant. The London broker will then advise completion to the Australian broker who, in turn, will inform the proposed insured and ensure confirmation of the cover which is likely to include an invoice for the premium and the statutory changes. In due course policies will be issued.
The practice in the Australian market is much the same. A prudent broker would obtain confirmation of cover in the form of a signed placing slip from the Australian insurer and issue what is called a “closing” to the insurer. The insurer would endorse appropriate documentation with “confirm bound”. In due course, policies would issue. I mention that the evidence of various witnesses establishes that in those circumstances the broker has the responsibility of paying the premium to the underwriters and of collecting it from the insured.
Hoffman also gave evidence about established standards of practice amongst Australian brokers. There is no need to refer to this evidence in detail. I merely mention that in the main it relates to prudent practices to ensure that there is suitable evidence of insurance having been placed by a broker and accepted by the insurer or underwriter. However, it is appropriate to now mention that, according to Hoffman, a competent broker will often rely on an oral acceptance of a risk by an insurer without written confirmation for a short period, say overnight, although with the advent of facsimile transmission he regards that practice as questionable. He said that the broker must confirm his order in writing immediately to the insurer and ensure that the broker receives written confirmation of the acceptance of the risk by the insurer. Many of these procedures are obvious enough and because some of them were not followed, difficulties which are the subject of this litigation arose.
The Insurance
As has been mentioned, BDO had professional indemnity cover with American Home Assurance Company during the year ending 30^th June 1991. It had been arranged by its long standing broker Marsh & McLennan. The amount of the cover was $20m. Grellman was requested to arrange cover for the next year, which is the subject of this action. He had discussions with Ellison who sought the business from BDO. Marsh & McLennan informed Grellman on 26^th June 1991 that it had obtained a quotation for cover of $20m for any one claim at a premium of $380,000 which could be slightly reduced in certain circumstances. The primary layer was mainly to be held by Lloyd’s Underwriters in London with part taken by GIO and an excess layer of $10m was to be held by GIO.
Grellman informed the national executive of BDO of the Marsh & McLennan quotation on 27^th June 1991. He then received a quotation from Willis Corroon in a letter of 28^th June 1991 written by Ellison. The level of the cover was the same but the premium was considerably less, namely $252,000 plus stamp duty. HIH were nominated as the insurer of the primary layer of $10m and GIO as the insurer of the first excess layer of $10m. It is apparent from this letter that Ellison was aware of the quotation from Marsh & McLennan as he presented arguments in favour of accepting the proposal of Willis Corroon.
Ellison gave this quotation to BDO without the authority of HIH. He did have what is described as a “binding authority” from HIH but not for contracts at this level of cover. This quotation was outside the binding authority. Brown did not accept this premium quotation. He increased it to $320,000 and informed Ellison accordingly. It was accepted by BDO. The contract of insurance was accepted by HIH for the primary layer of $10m and by GIO for the first excess layer of $10m. The period of both contracts of insurance was from 1^st July 1991 to 30^th June 1992. The premiums were paid, in proportions agreed by each of the BDO firms, to Willis Corroon which, in turn, paid them to HIH. Relevant policy documents were issued by HIH on 25^th September 1991 and GIO on 6^th November 1991. The number of the HIH policy was 911NK17092, the significance of which is mentioned later. It appears that an incorrect number may have been used in the schedule of the policy document issued by HIH but that is a matter of no importance.
It is a matter of significance that although HIH and Willis Corroon were both large organisations with considerable business activity, and that these insurance contracts were handled personally by Brown and Ellison and not through other members of their respective companies. This is not a case of imputing knowledge of others to them.
I mention the documentation of Willis Corroon and HIH which was brought into existence to effect these contracts of insurance. Once the quotation had been accepted by BDO, Ellison sent a facsimile transmission on 1^st July 1991 to Brown requesting binding of the insurance for the primary layer which Ellison signed. On the same day a memorandum in similar terms for the same purpose was sent by Ellison to GIO. It is accepted that the risk was bound at that time. Willis Corroon sent an invoice to BDO on 2^nd July 1991 with respect to the primary layer which set out the period of insurance, HIH as the insurer, the amount of the cover of $10m, the excess, the nature of the cover and the premium, stamp duty and broker’s fee. An invoice of similar nature was sent to GIO on the same day. As has been mentioned, HIH and GIO issued appropriate policy documents.
It may be seen that generally the type of documentation to which Hoffman referred was brought into existence, but Brown did accept this risk without having first issued a written quotation which Hoffman said was required in matters of this nature.
The Second Excess Layer
At the request of Wenham, Grellman wrote to Willis Corroon on 17^th July 1991 seeking a quote for additional cover up to $50m. On 19^th July 1991 Ellison replied by letter giving an indication of premium for two levels of second excess layer cover, $15m and $30m, and said that the increased cover could be bound upon obtaining instructions and a declaration to the effect that the claim situation revealed in proposals for the primary layer remained unchanged.
The executive committee of the national association of BDO decided on 24^th July 1991 to increase the professional indemnity insurance cover from $20m to $50m for the year ending 30^th June 1992. I accept the evidence of Martino, who attended the meeting and supported the proposal, that it would not have made any difference to him if the premium had been higher than $50,000, say $80,000. According to Grellman there was delay in effecting this additional cover but there was never a decision not to proceed. I accept that evidence. He was requested by the national executive to instruct Willis Corroon to proceed. He gave those instructions to Ellison who accepted them and set about trying to arrange the second excess layer of $30m at that premium.
There is disparity in the evidence of Ellison and Brown as to what then happened. Before reviewing the evidence, I make a preliminary observation about Ellison.
I accept his evidence that he now has no memory of these events. Documents admitted into evidence have not refreshed his memory. He has not reconstructed events from documents and other records and then claimed to have a relevant memory. I regard these matters as supportive of his credibility.
I now turn to important matters established by the evidence.
In 1991, HIH, by reason of arrangements with its parent company in London, had no authority to write cover of more than $15m for professional indemnity risks of this nature.
On 17^th July 1991 Grellman wrote to Ms Lyon of Willis Corroon requesting quotations for a second excess layer of $15m or $30m. Ellison saw the letter and acted upon it. He spoke to Brown. He has no recollection of doing so but gave evidence about his practice which accords with his having spoken to Brown. He said that he knew that HIH had the capacity to cover for $15m which was well known in the market. HIH was providing good terms for the primary layer and he expects that he would have believed that HIH would provide good terms for the second excess layer which would add to the premium which HIH would have for this risk. He said that it would have been a good idea to get HIH involved from this perspective. It was accepted that the chance of a claim embracing a second excess layer over $20m was unlikely and that is why a premium for such a layer would, in effect, add to the premium for the first layer.
Brown claimed to have a memory of these events. His evidence is that he remembers Ellison asking him if HIH would participate in a further excess placement above $20m and if he would provide terms for it. He said that he told Ellison that he could not see the point of it as HIH could only hold $5m. Ellison replied that as HIH was the primary underwriter, that would give “credence” even though it would be holding only a small amount. Brown told him that on that basis he did not have a problem with the proposal and gave him what he described as premium indications in accordance with a note which he said he recalled making following the discussion with Ellison.
There is a file note in the HIH underwriting file relating to BDO in the hand of Brown and initialled by him as follows:
“Nelson Wheeler B.D.O.
10m =  320000     -       Primary CEH
10m xs 10m                50000       -       GIO
15m xs 20          -       30000       )
30m xs 20          -       50000       )       5m line on either
[Sgd] 19/7/91”.
Brown said this was his own private note and represented no more than an indication of premium. He said that it was not a quotation. It may be seen that the note is dated two days after Grellman’s letter to Willis Corroon.
On 19^th July 1991 Ellison wrote to Grellman acknowledging his letter. He went on:
“I have negotiated terms with C E Heath and will easily find support for them with Lloyds or other acceptable insurers.
(a)Indemnity $15 million each claim in excess of $20 million each claim (total Sum Insured $35 million, with full retroactive cover).
Premium Indication: $30,000 plus Stamp Duty
(b)Indemnity $30 million each claim in excess of $20 million (total Sum Insured $50 million each claim with full retroactive cover)
Premium Indication: $50,000 plus Stamp Duty
We can bind the increased cover on provision of your instructions and declaration stating that the claim situation remains unchanged.
The necessity for an increased sum insured is very difficult to determine. The quantum of a number of claims in the process of being made against Australian Accountants dwarfs any Sum Insured below $100 million. Not many second tier firms would contemplate this sum insured at present.
On the positive side $50 million is a lot more than $20 million and it is relatively inexpensive at present. If we purchase it now, full retroactive protection is granted. Purchasing increased protection in a hard market usually involves higher cost and limitation on retroactive cover.
I look forward to being advised of your decision. If we can be of any assistance in the meantime please contact me.”
According to Brown, he had a subsequent telephone conversation with Ellison who told him that BDO was not going ahead because it was “too dear”. Brown said that he heard nothing further about the matter until it was alleged in 1998 that HIH held 24 percent of the second excess layer.
As will be seen, I reject Brown’s evidence about this conversation.
There is no doubt in my mind that when Ellison wrote the letter of 19^th July 1991 to Grellman he had discussed the matter with Brown who had agreed to participate in a second excess layer on either of the bases referred to in the letter which accords with Brown’s own handwritten note. Those bases were that HIH would take $5m on either a $15m second excess layer with a total premium of $30,000 or a $30m second excess layer with a $50,000 premium. That finding is supported by Brown’s evidence, already mentioned, that he told Ellison that he did not have a problem with the proposal which I interpret as including that HIH would lead the layer.
Ellison had failings which were mentioned by members of his staff who gave evidence. These failings were largely in relation to paper work. He did not always make appropriate records and ensure that necessary documentation was created. However, he was a very experienced, successful and able broker and I accept that he wrote the letter to Grellman in those terms because Brown had indicated that HIH would participate.
At this stage there are two other matters of significance. Brown acknowledged in his evidence that the securing of BDO as an insured with his company was important to, and good business for, HIH. BDO was one of the three biggest accounts of HIH for that year. He said in cross-examination by Mr Douglas QC, for Willis Corroon, that he was more than happy to participate in the second excess layer with a total premium of $50,000. He would have accepted the proportion of the risk if Ellison had come back to him and said that BDO agreed. He was willing to assist in that way. He agreed that the premium which HIH would receive for its participation in the second excess layer was “really money for jam”, although he went on to say it was a relatively insignificant amount. However, he said that claims within the second excess layer over $20m are not expected. I accept that Brown was willing to participate.
The other matter of significance is that only five days after Ellison’s letter to Grellman of 19^th July 1991, the executive committee of BDO resolved to proceed on the basis of a premium of $50,000. Ellison was keen to secure the cover. He was not looking for an excuse not to participate. According to Martino and Grellman, there was never any change of mind on the part of BDO. There was no reason for Ellison to say that the premium of $50,000 was too dear. Furthermore, as will be seen, that was the premium which was mentioned to Lloyd’s and the London market at Ellison’s instigation.
I reject Brown’s evidence that Ellison told him that a premium of $50,000 was too dear.
London
There seems to have been a delay in BDO instructing Ellison to proceed with the second excess layer of cover. Grellman had no recollection of that delay or the reason for it but it is likely that it was caused by delay in response to Grellman by some of the smaller offices of BDO which did not regard the second excess layer as necessary.
On 19^th September 1991 Ellison sent a facsimile transmission to Mr Townsend of Willis Faber and Dumas Ltd (“Willis Faber”) in London regarding the second excess layer for BDO. Townsend was a placing broker in the London market. It began:
“We have an order to place $30mx$20m each claim
premium: $50,000
payable in ¼ instalments.
CE Heath who write primary $10m have offered to lead this layer and take $5m (16.%).
Do you wish to place remainder?
Premium is a flat $50,000 for fully retro-active cover (excluding known circumstances) period 1.9.91 to 1.7.92
.....”
I have mentioned failings of Ellison. There is no record in the files of Willis Corroon of the instruction from BDO to proceed with the second excess layer or of Ellison’s conversation with Brown on 19^th July 1991, but undoubtedly both occurred. Furthermore, the delay in sending the request to London is significant. The primary and first excess layers of insurance were arranged by Ellison expeditiously. The delay in arranging the second excess layer suggests that he was awaiting instructions. He did not simply proceed in the mistaken belief that he did have instructions.
Ellison said in evidence that he would not have sent the facsimile transmission to London in these terms unless he had discussed the matter with Brown and he had agreed to lead and underwrite that layer. When cross-examined by Mr Trim QC, for HIH, he said that as two months had elapsed he thought that he would have checked with Brown. Premiums could alter and he said he was almost certain that he would have checked with him before writing to London. I accept that evidence.
Willis Faber responded promptly and after obtaining further information commenced placing the risk in London. Documents were admitted into evidence which relate to this activity and to the exchanges between Willis Corroon and Willis Faber regarding that matter. It is clear from those documents that the total risk was not placed quickly. These communications are consistent with HIH having agreed to participate. I mention the facsimile transmission of 30^th October 1991 from Willis Faber to Willis Corroon advising that at that date 61 per cent of the risk had been placed “plus your involvement with Greg”. On another copy of this document is written “67% London 23% CEH. Prem $50,000 ...” which, of course, refers to CE Heath.
Willis Corroon sent an invoice to BDO dated 1^st November 1991 for the premium and stamp duty for the total of the second excess layer. This invoice refers to Lloyds as leading overseas placements. It does not refer to HIH. I do not regard that as a matter of significance. The period of the cover was from 1^st September 1991 to 30^th June 1991, a period of ten months. The original premium indication of $50,000 was given in July 1991 for a period of twelve months. It appears that the reluctance of underwriters in London to accept the risk at that premium was overcome by the reduction in the period which had the effect of an increase in the premium on an annual basis to $60,000. Mr Bartle was the managing director of Southern Cross Underwriting Pty Limited in Melbourne. On 11^th November 1991 Ellison sent a facsimile transmission to him in the following terms on the subject of professional indemnity insurance for BDO:
“Attached is our slip in respect of $30 million in excess of $20 million layer. This layer is led by CE Heath and is about 80% full at present. CE Heath have offered to front on your behalf. CE Heath write the primary $10 million for $300,000 and GIO write $10 million excess $10 million for $50,000. Upon confirmation of your participation, I will put a copy of the full submission in the bag. I look forward to hearing from you shortly.”

On the same day Bartle replied to Ellison confirming agreement to accept 7.5 per cent of the second excess layer at the gross premium of $60,000 subject to acceptable claims experience. 7.5 per cent of this layer would leave 16.5 per cent for HIH if it was involved. Such percentages result in cover of $2.25m and $4.95m respectively which is within the total capacity of HIH being $5m in addition to the $10m primary layer. On 14^th November 1991, Ellison wrote to Bartle asking him to confirm bound the re-insurance of the risk. Policy documents were sent to Bartle on the same day. Also on that day Ms Roepers from Willis Corroon wrote to Resource Underwriting Pacific Pty Ltd enclosing the slip of Willis Corroon for the second excess layer which, at that stage, was 87.5 per cent completed, including HIH, the participation of which was mentioned in both the primary layer and the second excess layer. Resource Underwriting Pacific is one of the participating underwriters in the London market.
Ellison said that he did not think he knew Bartle before the facsimile transmission of 11^th November 1991. Although he has no memory of this matter, he said that he would only have written to him in these terms if he had permission from HIH to use them as a front. He said that at this time he was in daily contact with Brown and he would have explained that he was having difficulty in London. He expects that Brown would have suggested using Southern Cross and offered for HIH to “front” on its behalf. Ellison said that he regarded this approach as new to him.
Southern Cross was not a licensed insurer for these purposes in Australia but it could act as a re-insurer for a licensed insurer, such as HIH. Ellison understood that Southern Cross had an existing relationship with HIH at that time.
In his evidence Brown said that he had known and had dealings with Bartle for some years but not on a regular basis. Southern Cross was a company which was used on occasions by HIH for re-insurance purposes. However, he said that Southern Cross was not used exclusively and rarely did HIH enter into insurance arrangements above its capacity, which, as has been mentioned, was then $15m. He said that HIH used Southern Cross rarely.
According to Brown, he had no knowledge of the involvement of Southern Cross until 1998 after judgment had been given in the Duke action. He said that if Ellison had contacted him in November 1991 to ascertain if the cover and the premium were still available, he would have asked for a no claims declaration and for evidence of the placement with Southern Cross as the re-insurer with HIH. It is implicit in his evidence that he did not have any conversation with Ellison in November 1991 or at any time in that financial year agreeing to accept the risk with Southern Cross as the re-insurer.
It was common ground that Southern Cross did accept the risk as re‑insurer in accordance with the documents which have been mentioned. None of the parties called Bartle and his absence from the witness box was not explained. I do not think it is appropriate in the circumstances to draw an adverse inference against any party for that reason. He did not fall within the camp of any party: Spence v Demasi (1988) 48 SASR 536 per Cox J at pp547-548. He was presumably available to each of them. I think the only inference which can safely be drawn from his absence from the witness box is that he could not give any evidence which would shed any light on any matter in issue.
It is significant that on 11^th November 1991 Ellison also sent an electronic mail communication to Willis Faber providing required information about the claims history of BDO Adelaide and added:
“Good news is that I have picked up another 7.5% locally from C.E. Heath. This only leaves 13% for you to finish today.”
On 19^th November 1991 Ellison wrote to Grellman and informed him that the placement of the second excess layer had been completed having been placed with “CE Heath Casualty and General Insurance Limited, Lloyds and London market companies”. He mentioned that one of the insurers had sought written clarification of the claims referred to in the proposal form completed by BDO Adelaide and asked for a response as soon as possible.
On 20^th November 1991 Willis Faber sent a memorandum to Ellison advising that the 76 per cent placement had been achieved in London and setting out the names of the participating underwriters and the percentages which each of them had accepted. This memorandum contains the following:
“In view of C.E. Heath’s participation please confirm our order in writing, ie 76% (if possible) or 75.83%.”
On this document Ellison has written:
“76%  LDN
         CEH          (       7.5%         STN
  (       16.5%       CEH”
and lower on the document:
“Confirm you have ordered at 76% thanks and regards”
It is appropriate at this stage to make some observations about important aspects of this evidence. At all times Willis Corroon only sought 76 per cent of the second excess layer in the London market. If HIH had not agreed to be involved, the total layer would have had to be placed in London or elsewhere. It is hardly likely that Willis Faber would have been asked to go to such lengths to secure placement in London if HIH had not agreed to lead. It defies understanding that an experienced broker such as Ellison would, at the time, have asserted that HIH would lead the layer if Brown had not informed him accordingly. He would understand that any underwriter in London could at any time speak to HIH about the matter even if that was unlikely to occur. It is highly unlikely that Ellison would make re-insurance arrangements with Southern Cross and inform Bartle of the involvement of HIH without the knowledge and approval of Brown, particularly as he did not know Bartle. Brown had a working relationship with Bartle and it is to be expected that the re-insurance could have been mentioned by Bartle to Brown at any time. The message to Willis Faber on the day of procuring the re-insurance with Southern Cross suggests that those arrangements enabled the total of 100 per cent placement to be completed. As has been mentioned, that matter and Ellison’s handwritten note, leave no doubt about his state of mind and strongly suggest that HIH had agreed to participate. Also, it is difficult to understand why Ellison would inform BDO that the excess layer had been placed in its entirety unless he believed that to be true. He could not have held that belief if he had told Brown that the premium of $50,000 was too dear.
This evidence establishes, in itself, that Ellison genuinely believed that Brown had agreed to participate in the second excess layer to the extent of $5m. Any contrary view would require a conclusion that instead of Ellison approaching his friend Brown at HIH and requesting his assistance, he set out to deceive Bartle, Willis Faber and Grellman or had been grossly incompetent. He had no reason to deceive anyone and no motive, financial or otherwise, to involve himself in such a deceptive and elaborate process. The brokerage on the premium for the second excess layer was only $3,350. Apart from his failings in the realms of paperwork, I have not found Ellison to be incompetent in his work as an insurance broker. I reject any suggestion that he said that the risk had been accepted by HIH due to his wrongly believing that to be the case because of incompetence.
Records
Before reaching any conclusion about the truthfulness of Brown or Ellison, it is also necessary to look at what happened after 19^th November 1991.
It is appropriate to consider the documentation which was brought into existence by Willis Corroon and HIH following 19^th November 1991 in relation to the second excess layer. It is the case of HIH that even accepting the evidence of the failings of Ellison concerning paper work, the absence of basic documentary evidence of the involvement of HIH in the second excess layer necessarily means that it did not so participate.
In order to evaluate this submission, it is necessary to have regard to all of the evidence and I begin with the evidence of Hoffman. He said that with this type of insurance, there must always be a closing from the broker and what was described as a “confirm bound” endorsement from the insurer. The closing from the broker would also result in the issue of appropriate documents by the insurer and operate as a trigger for an entry into the accounts of the insurer. An example of this procedure is to be seen in relation to the 1993 year where Willis Corroon sent such a request for confirmation that the second excess layer had been bound and it was endorsed by HIH “confirm bound” and was signed and dated by Brown. No such document was brought into existence with respect to the second excess layer in the 1992 year. There should also be a separate certificate of insurance and a separate policy document issued for the participation in the second excess layer in addition to each document issued with respect to the primary layer. The fronting insurer should acquiesce in the re-insurance, such as is alleged in the present case, with written confirmation from that insurer. None of those documents exist.
Ellison acknowledged that the documents should have been brought into existence. He agreed that the request to bind was the normal procedure and staff at Willis Corroon were instructed accordingly. He could think of no other instance apart from the present case, where there was no written confirmation in a file of Willis Corroon. He said that invariably HIH issued a certificate within a few days of being bound. He could not recall any instance where HIH agreed to be bound but there was no closing or certificate of insurance issued. He said that the circumstances of this case are the only occasion where it has been asserted that an insurer is on risk but there is no policy documentation in existence. There were hundreds of occasions, he said, when he dealt with Brown and this was the only occasion when HIH is said to be on risk but he had never received a certificate or any policy documentation. The significance of this evidence must be evaluated against whether the lack of documentation would be known unless some problem arose.
Upon acceptance by HIH of part of the second excess layer risk, it should have issued a certificate of insurance specifying the insured, the risk, the amount of cover, the premium, endorsement details and other relevant particulars and a policy document separate from those of the other participants in the layer. It was Ellison’s experience that HIH issued certificates of insurance promptly. In subsequent years the appropriate documentation was issued by HIH with respect to professional indemnity insurance cover issued to BDO. Ellison could not offer any explanation why there were no documents in the files of Willis Corroon constituting evidence that HIH had participated in the risk.
In his evidence Brown described HIH’s usual practice and procedure. Despite other features of Brown’s evidence, there is no reason to reject his description of these matters. The broker would send to HIH a submission which usually comprised a proposal form and a covering letter requesting the type of insurance and containing other relevant information. HIH would then prepare a written quotation and give it a number in its computer records. I interrupt to again mention that there is no evidence of a written quotation with respect to the primary layer for the 1992 year and so the practice was not invariably followed. If the quotation was accepted, the broker would send a written request for the risk to be bound. Brown acknowledged that occasionally there would be a verbal acceptance of the quotation in which case he would make a note of the relevant details and the assigned reference number. Verbal acceptances represented about one per cent of cases. In all other cases after acceptance by the broker, Brown would, on some occasions, send a letter, telex or a facsimile transmission confirming the cover, but in most cases he would simply write “confirm bound” on whatever document the broker had sent accepting the offer and then return it to the broker. Usually a stamp of HIH was placed on that document. Documents of that nature with that endorsement and stamp were admitted into evidence in relation to other transactions. A copy of that document should be kept on the underwriting file.
An invoice from the broker was usually the second document which was sent to HIH. It had the effect of requesting HIH to process the premium. In about 90 per cent of cases, HIH issued the invoice and policy documentation before receipt of the invoice from the broker. The policy documentation referred to by Brown is not an insurance policy document but the certificate of insurance to which reference has been made. This certificate also records the policy number and, according to Brown, is evidence of the insurance contract. He said that it was the practice of HIH to issue the certificate, if possible, within 21 days of the cover being bound. Further, certificates are issued as alterations or further endorsements are made to the policy. In such cases a letter of the alphabet is usually added to the policy number as occurred in the present case with respect to the primary layer. The second copy of the certificate is the same but also includes the amount of brokerage and the net premium due to HIH which, I understand, is sent to the broker. A file copy of the certificate is kept by HIH as well as a working copy.
The policy number remained the same year after year with an alteration to signify the year, for example, 91 would change to 92 if a policy was issued in 1991 and renewed in 1992. A file for each insured was opened and kept by HIH. The relevant files of HIH for BDO were admitted into evidence. Renewal notices would be sent out about two months before the policy expired and the renewal procedure would commence.
In the context of what documents ought to have been brought into existence, I mention the evidence of Ms Roepers. In 1991 and 1992 she was employed as the personal assistant to Ellison. She had commenced employment with Willis Corroon in 1989 and went on to later become a broker. She has no recollection of events relating to the present case.
She confirmed many of the practices and procedures mentioned by Ellison and Brown. According to her, Ellison usually attended religiously to confirmation of HIH being bound and did so by facsimile transmission. She checked whether policy documents had arrived and if they had not she would contact the insurer. She said that if HIH had gone on risk with respect to the second excess layer, she would have expected to see a policy document. She can recall no other instance of HIH being on risk and there being no policy document. Other witnesses employed by Willis Corroon, namely Ms Thompson and Mr McKay, gave evidence along similar lines and it is not necessary to set out the detail of that evidence. I mention another aspect of Roeper’s evidence. She said that there was a practice for Willis Corroon not to send a copy of the invoice to the insurer. I do not accept that evidence entirely. It is partly true and she is partly mistaken. I think the correct assessment of all of the evidence is that invoices were usually sent late to HIH and on some occasions they were used as the “confirm bound” document, but I do not think there was a deliberate practice of not sending invoices promptly or at all.
It has been clearly established what ought to have been done. Plainly Ellison did not follow these procedures. It is necessary to consider what was done. There was no formal written quotation duly recorded and numbered in the records of HIH. There was no written acceptance of such a quote or a request to bind the risk. Willis Corroon did not send an invoice to HIH. There was no allocation of a policy number different from that given to the policy for the primary layer. There was no issuing of an invoice for the premium by HIH.
However, it is reasonable to conclude that when an initial fundamental procedure, such as sending a written acceptance of a quote, is not undertaken, the procedures that ought to follow are not likely to be undertaken, particularly when the respective officers of the broker and the insurer are busy.
On 1^st November 1991 Willis Corroon raised invoices internally for the second excess layer in relation to the premium to be paid by BDO, including brokerage, overseas placements tax and stamp duty specifying the overseas insurers at 64 per cent or thereabouts and HIH at 33 per cent. It will be remembered that the total 76 per cent placement overseas had not been finalised by this time. These invoices were raised by Willis Corroon for internal monthly budgetary purposes and none of them were sent to HIH. The invoices are debit invoices and show amounts owing to Willis Corroon by BDO and by Willis Corroon to the various insurers including HIH. The reference to 33 per cent in relation to HIH was explained as the balance of the cover not placed in London. For internal budgeting purposes, it was apparently necessary for some to show a 100 per cent placement. These various invoices were entered into the records of Willis Corroon. No other documents were brought into existence at this time.
On 28^th January 1992 Roepers received a facsimile transmission from Southern Cross indicating that the premium due to it was outstanding. On 4^th February 1992 another invoice was compiled probably by Ms Roepers. She corrected the then position as shown in the earlier invoice to include Southern Cross as a re-insurer of HIH. This new invoice was the final form of invoice for BDO but was retained in the file of Willis Corroon. It may have been the memorandum from Southern Cross which caused activity in Willis Corroon at this stage, but the reason is of no consequence. On 18^th February 1992 Willis Corroon prepared another batch of invoices which included an invoice addressed to HIH with correct information as to the 24 per cent participation and the premium, stamp duty and brokerage. There is no evidence that this invoice was sent to HIH. It has not been located within the records of HIH.
These activities are consistent with Willis Corroon having placed the risk with HIH and with the inefficiency in the past of Willis Corroon in processing the necessary paperwork.
On 5^th March 1992 an invoice was prepared by Willis Corroon with respect to the re-insurance by Southern Cross. It was addressed to HIH and set out the relevant information about participation in the second excess layer. The portion of the premium due to Southern Cross was $3,468.75 with the balance of $7,031.25 due to HIH. This latter amount included an exchange commission of $281.65 due to HIH for acting as the fronting insurer for Southern Cross. These calculations were made by Roepers and her written calculations were admitted into evidence. It was agreed by Roepers and Ms Sarto, then an administration and accounts clerk at Willis Corroon, that the amount due to Southern Cross would be deducted from the total premium due to HIH. Neither of them have any recollection of discussing the matter, but there is a note to that effect in Sarto’s hand in the records of Willis Corroon.
As will be mentioned shortly, BDO paid the premium to Willis Corroon which paid the amounts due to HIH and to Southern Cross. HIH did not reject the premium or indicate to Willis Corroon or BDO that it had not accepted participation in the second excess layer.
On 11^th June 1992 BDO wrote to Ellison in relation to insurance cover for the next year and enclosed completed proposal forms for each of the participating firms. The letter contained the type of information relevant to an application for renewal of insurance. Also included was a copy of the letter from Ellison to BDO of 19^th November 1991. It will be remembered that in this letter Ellison informed Grellman that Willis Corroon had placed the second excess layer with HIH, Lloyds and London market companies. It is significant that a copy of this letter was given to HIH in June 1992. It is also significant that Brown read these proposal forms when considering renewal of the insurance. He fixed the premium and decided to accept the risk. A further matter of significance is that there was no suggestion from HIH that it had not participated in the second excess cover as indicated in the letter. Later I mention the evidence of Brown about this letter as he said he did not read it, and because this evidence reflects upon his credit.

In June 1992 Duke Group gave notice to Nelson Wheeler Perth of the claim for damages which is the subject of the Duke action. On 30^th June 1992 BDO gave written notice of the claim to Willis Corroon who, in turn, gave notice within the claims period to HIH. HIH accepted the claim and appointed solicitors, Phillips Fox in Perth, to act on its behalf and for Nelson Wheeler Perth.
It was not until after judgment in the Duke action that HIH asserted that it did not participate in the second excess layer. Indeed Brown said that he was not aware of any suggestion that HIH had participated until that time.
The Premium
After Grellman received the letter from Ellison dated 19^th November 1991 he wrote to each of the participating BDO firms advising of the second excess layer cover and the premium and stamp duty which he apportioned amongst them. The invoice which was raised by Willis Corroon on 1^st November 1991 addressed to BDO for the premium and stamp duty was sent to BDO. There was delay in payment of the premium by two of the participating firms of BDO. Ellison wrote to Grellman on 9^th January 1992 bringing this matter to his attention.
On 10^th February 1992 BDO paid most of the balance of all premiums due to Willis Corroon, namely $42,356.08. The two defaulting participating firms paid the amounts due by them respectively on 28^th April 1992 and 9^th June 1992. Of this premium of $50,000, the amount due to HIH, if it had accepted the cover, was $12,000, plus $300 for stamp duty and less $1,800 for brokerage, making a total of $10,500.
On 23^rd March 1992 Willis Corroon paid $7,031.25 to HIH and $3,468.75 to Southern Cross. On 24^th June 1992 Willis Corroon also paid $3,468.75 to HIH after receiving an overdue payment for BDO on 15^th June 1992. These payments were made to HIH on each occasion as part of a composite payment also involving premiums for other insurance business but they were identified and correctly attributed to BDO in the records of HIH. However, they were not attributed to premiums for the second excess layer or to any particular insurance cover for some considerable time. Those premiums have been retained by HIH ever since. It will be seen that Willis Corroon paid the premium for the re-insurance twice, once to Southern Cross and once to HIH.
A considerable body of evidence both oral and documentary was adduced as to how these premiums were treated by HIH. I see no purpose in repeating all of this evidence. What it establishes is that for a considerable period of time the $10,500, which is the total of these two amounts, was not allocated to any particular insurance cover for BDO. It was not attributed to the primary layer or the second excess layer. As may be expected, there were many financial transactions between HIH and Willis Corroon. HIH prepared a statement each month entitled, “Adhoc Statement of Account” which set out the financial transactions involving the Sydney office of Willis Corroon. Those relating to professional indemnity insurance for each month from August 1991 until January 1994 inclusive were admitted into evidence. There was a considerable body of oral evidence led about those accounts but for present purposes I need only mention the findings which I have made on this evidence relevant to facts in issue. In the statement for March 1992, the amount of $7,031.25 was shown as “unidentified cash/payment” against the name of BDO and the policy number issued with respect to the policy for the primary layer. That entry continues each month in these accounts until October 1993, but not always in the same section. In the June 1992 account, the amount of $3,468.75 appears for the first time in a section entitled “Items becoming due” also with respect to BDO and the same policy number. Both amounts thereafter appear in the accounts under various headings being those mentioned and “overdue items”. In the statement for November 1993, the amounts are shown as “items matched this month”.
It may be seen that the records of HIH attributed these payments correctly to BDO and for the total amount of the 24 per cent of second excess layer, in accordance with the premium fixed by Brown, but they were not identified in the records as relating to such a layer. I am satisfied that the reason is that no certificate of insurance had been issued by HIH for the second excess layer. It was established by the evidence that it is not uncommon for insurers to be unable to attribute particular premiums to a specific policy and to have to resolve these matters with brokers. The adhoc statements themselves also demonstrate that matter.
Despite HIH sending, and Willis Corroon receiving, these statements for 16 months until June 1993, it appears that no-one from either company did anything during that period to resolve the matter which does not reflect well on either company. When something was done about it in September 1993, the matter was resolved quickly and, in my view, relevantly, but not adequately.
Mr Chung was employed in the accounts department of HIH. He sent a facsimile transmission to Sarto on 17^th June 1993 in which he referred to a discussion with her on the previous day. She, and other witnesses from Willis Corroon, do not have any recollection of events relating to this matter. Chung was not called to give evidence. Consequently, what occurred may largely be constructed from documents which were admitted into evidence. Mr Williams and Ms Harris, who were employed in the underwriting section of HIH, gave evidence which has assisted in determining what occurred.
It seems clear that Chung asked Sarto to clarify these two amounts in the adhoc statements. A facsimile transmission from HIH to Willis Corroon sent initially, it would appear, in September 1993 and again in November 1993 indicates that the queries had been resolved by the latter date because the two entries are crossed out on that document. This document is also significant for another reason. BDO, through Willis Corroon, was insured with HIH for a second excess layer in the 1993/1994 year and there was a confirm bound endorsed by Brown on 1^st July 1993. The level of cover was the same and HIH was bound for 16 per cent. In the facsimile from Chung to Sarto, it is clear that the premium for that cover had not been attributed to that insurance. Although there was the confirm bound endorsement, Willis Corroon did not prepare an invoice until about 12^th August 1993. It does not appear to have been sent to HIH by the time of those queries from Chung and there is no evidence that a certificate of insurance was issued by HIH. These matters indicate that the practice established by the evidence was not always applied. Contrary to the submission of Willis Corroon, I do not think that it also suggests that the inability to identify the $10,500 was not due to the absence of a confirm bound.
On 29^th September 1993 Chung prepared a document entitled “a premium adjustment request” which he sent to Harris. It contains the policy number issued by HIH for the primary layer and indicates the insured as BDO. It requests that a debit be raised and refers to the “closing” attached. The space for the policy number had been whited out on the original and the policy number for the primary policy had been written over that space. There was no explanation as to why that had occurred and in the absence of any evidence, it is not appropriate to attribute a sinister reason.
The document attached to the premium adjustment request is a copy of the invoice of Willis Corroon brought into existence on 1^st November 1991 which has been mentioned. The printed details of the facsimile transmission of this document indicate that it was sent to HIH on 21^st September 1993. Sarto said that she wrote on the invoice the two amounts of $7,031.25, showing payment in March 1992, and $3,468.75, showing payment in June 1992. This invoice incorrectly shows HIH to have accepted 33 per cent of the risk for the reasons already explained, but otherwise it provides correct information about the alleged participation of HIH in the second excess layer. At this stage, it may be seen HIH had accepted the premium due to itself and Southern Cross and had been informed as to the insurance cover to which it applied, namely the second excess layer. The other document attached to the premium adjustment request is a printout prepared by HIH relating to BDO and the amount of $7,031.23, bearing the date 1^st September 1993. There are printed comments on the document which suggest that there had been discussion between someone at HIH and Sarto before that date. These comments specifically state that Chung had requested the “closing” on 17^th August 1993.
The absence of Chung from the witness box has not been explained but I am not prepared to draw an inference adverse to HIH for that reason. The evidence enables a finding to be made that by September 1993 HIH, through Chung and Harris, had been informed that the premium payments of $7,031.25 and $3,468.75 related to the second excess layer and of the participation of HIH to the extent of 24 per cent in that layer, which was shown in the invoice to be $30m excess over $20m.
Whilst the evidence is not entirely clear, it is likely that at this time Harris was Brown’s personal assistant or, at the least, she did secretarial work for him.
It is contended by Willis Corroon that HIH initially processed the premium of $10,500 in accordance with the understanding reached between Chung and Sarto, that is, that it was the premium for 24% of the second excess layer, but that HIH processed it differently when the premium adjustment request reached Harris.
In the statement of account as at 30^th September 1993 sent by HIH to Willis Corroon, the $10,500 is shown in the section headed “Items becoming due” with a transaction date of 24^th September 1993 and the basic policy number for the primary layer policy. The transaction type is shown as “EP” which means “extra premium”. The November 1993 statement shows that this “extra premium” was matched with the two outstanding amounts which total $10,500 referred to in many of the previous accounts. This transaction date accords with the appropriate time of the discussions between Chung and Sarto.
When the matter came to Harris, a certificate of insurance was prepared with the policy number for the primary layer with the endorsement “Accounts entry only - entry to match money received 92”. This certificate was not sent to Willis Corroon or BDO. According to Brown, this certificate was an internal accounting entry and was the raising of the entry as a credit against the primary policy. He said he had not seen it before this trial. It was, he said, a fiction as the premium for the primary layer policy had already been paid. He said that what had happened was a mistake, because the primary layer was the only policy in force when the $10,500 was received in March and June 1992.
Of course, this evidence of Brown is supposition on his part because he said he played no part in the transaction and he had no direct knowledge of it. Clearly the insurance certificate does not reflect what had been discussed between Chung and Sarto or what is contained in the premium adjustment request which, as has been seen, referred to the “closing” attached which referred to the second excess layer.
It is submitted by Willis Corroon that if the issuing of this certificate in these terms is a mistake, it is an extraordinary one because the premium had been paid and the “closing” relating to the second excess layer had been attached and referred to specifically. Mr Williams was an underwriting assistant in the underwriting section of HIH at relevant times, including in September 1993. He is familiar with the process of issuing insurance certificates with endorsements, including for premium adjustment requests for accounting purposes only. He wrote the insurance certificate and gave it to Harris for processing. The words used indicate that it was an internal adjustment of premiums. He said that he does not recall seeing the invoice, described as the “closing”, on the computer printout attached to the premium adjustment request. He said that these documents would have been given to him by Harris. He would have obtained the policy number from the computer or retrieved the file and checked the name of the insurer. In giving this evidence, he was attempting to re-construct what occurred. However, he must have read the invoice in order to have written the premium on the insurance certificate.
There is another matter of significance. The policy number for the primary layer issued in 1991 is 911NK17092. On some documents 91 is recorded rather than 911 but that is not a matter of importance. I have mentioned that a letter was added to the policy number as additional endorsements were made. This policy number was retained for the primary layer in subsequent years except that 91 became 92, 93 and so on, as the first two digits indicate the year of the policy. BDO insured with HIH in subsequent years. The question arises as to how Williams knew the insurance certificate issued in consequence of the premium adjustment request was to relate to the 1991 policy, because the year was not shown on that request. Williams could not recall how he made that decision but said that he presumed that he chose the 1991 policy because the premium was paid in that financial year. However, the date the premium was paid is not shown in the premium adjustment request. The attached computer print out shows a transaction date of 12^th October 1992 which is incorrect, as it relates to journal entries. The computer printout refers to the 1992 policy.
Williams said in cross-examination that if he had received no instructions and had read the premium adjustment request and the attachments, he would have noticed that there was a new level of insurance and he would have passed the matter on to an underwriter. However, he said that did not happen and he was not given instructions to prepare the certificate as he did. He made that assertion because there was no note to that effect on the file.
This evidence is curious but it is insufficient to lead to the conclusion that Brown was aware at the time of what had occurred over his assertion to the contrary. It is submitted that he was intimately connected with the BDO insurance and it may be expected that a matter of this nature would have been referred to him in any event, particularly because Harris was his personal assistant or did secretarial work for him. Furthermore, by this time the Duke claim had been made and notified and it was known that the claim exceeded all layers of cover. This last matter does not point in only one direction. It may be said that if Brown was aware of these events in September 1993, he would have rejected the assertion of participation in the second excess layer to avoid the risk of payment beyond the primary layer. On the other hand, if he was aware of these events, and he knew that HIH was on risk at the second excess layer, he may have chosen to say nothing to Willis Corroon in the expectation that Duke Group would not succeed in the Duke action and so as not to raise the issue with Willis Corroon at that time.
Upon consideration of all of these matters, I do not think the evidence is sufficient to justify a finding that Brown knew about the payment of the $10,500, that the underwriting section of HIH appreciated that it had been made with respect to the second excess layer or that there has been an attempt to mislead the Court about this matter. It is possible that the premium adjustment request was handled as has been re-constructed by the HIH witnesses. However, even if that is what occurred, the fact remains that HIH was informed by Willis Corroon of the purpose of the premium, and did not reject that assertion, which is some evidence that HIH did participate in the second excess layer.
Considerable attention was given in evidence to what occurred in the 1993/1994 year when a similar premium adjustment request was made with respect to the second excess layer, but I have not found that evidence to be of assistance in resolving the issue as to what happened in September 1993.
Other Matters
I now turn to the various other matters which are relevant to Brown’s credibility and whether HIH had participated in the second excess layer.
Mention has been made of the proposals forms and the copy of the letter of 19^th November 1991 from Ellison to BDO which were in the possession of Brown in June 1992 when he was considering renewal of the professional indemnity insurance for BDO. These documents are to be found in the HIH file relating to BDO. It is clear from his evidence that Brown carefully considered the letter from BDO to Ellison along with the relevant proposals forms. This bundle of documents included a copy of the letter of 19^th November 1991 and other correspondence. There are about 51 pages in all. The letter is placed between the proposal of BDO Adelaide and correspondence regarding that firm and other proposals.
The heading of the letter is in upper case and is:
“RE: PROFESSIONAL INDEMNITY INSURANCE
THIRTY MILLION IN EXCESS OF TWENTY MILLION LAYER.”
Brown was questioned about this letter. At one stage during cross-examination he said that he did not see the letter. He later said that he did not have any memory of seeing the letter. He then acknowledged that he would have seen the letter but he did not read it beyond the heading. He acknowledged that he would have read all of the documents in the bundle before and after the letter in the sense of scanning them but not this letter. He also acknowledged that he would have read the document immediately before this letter in the bundle which is an internal memorandum of BDO and which refers to the letter. He explained that when he reached the letter in the bundle he would have seen that it related to $30m in excess of $20m and would not have read further. He said that as that information was in the heading of the letter, he did not need to go further. The reference in the letter to HIH’s participation in the second excess layer is but five lines below the heading.
The presence of this letter in the documents which Brown admittedly read, or scanned, at this time is of considerable importance. If he read the letter he would have seen the assertion that HIH was on risk with respect to the second excess layer, and the fact of his not taking any action would be compelling evidence that the letter merely told him what he already knew, that his agreement with Ellison for participation in the second excess layer had been completed.
I do not accept Brown’s explanation.
I regret to say that, in my view, he was not being truthful. The heading of the letter and, in particular, the words underlined, relate to the very level of cover which he had discussed with Ellison and about which he had given an indication of premiums for partial participation. It was the level of premium for the second excess layer which, he says, Ellison told him BDO would not pay. This letter was about a topic which was in his memory and remains so today. These events occurred at about the time of notification of the Duke claim.
The only inference which can be drawn from this evidence is that Brown did see the letter and it was about a matter well known to him. I find that he did read the letter. If he believed that HIH was not on risk, he would have taken immediate action by searching records and making enquiries of staff and of Ellison. If HIH was not on risk, he would have informed BDO accordingly. In my view, this is compelling evidence that HIH had participated in the second excess layer and that Brown is lacking in credibility.
Furthermore, this evidence establishes that Willis Corroon did inform HIH of its participation in the second excess letter by sending a copy of the letter to it and there was no response to the contrary.
Another matter of significance is the information which was given to Phillips Fox in Perth by Willis Corroon in early 1993. Earlier I mentioned Ms Thompson. She is a solicitor who, at the time, was employed by Willis Corroon. She had always worked in the insurance industry. She worked for Willis Corroon during various periods from 1980 until 1995 and for other brokers. She knew Ellison well and worked with him on a day to day basis. She also knew Brown. She has considerable experience in the business of insurance broking.

In February 1998 HIH sought to recover from the excess layer insurers contributions towards defence costs which at that time amounted to a little in excess of $16m. Brown wrote to Willis Corroon on 18^th February 1998 setting out calculations on the basis of the total indemnity limit being $50m. The calculations were that given the amount of the judgment of $94m, the insurers would have to pay 53.19 per cent of the costs and Nelson Wheeler would have to pay 46.81 per cent by reimbursing the insurers. This approach was based upon the interpretation by HIH of the policies. This letter acknowledges the existence of a second excess layer of $30m.
At no time before judgment in the Duke action was there any denial by HIH of participation in the second excess layer. However, as has been mentioned, Brown says that he did not hear of any suggestion that HIH was involved in that layer until after judgment. I reject that evidence having found that Brown was aware at all relevant times.
Ms Proud of Willis Corroon passed this memorandum on to the London insurers and she received a response that they maintained they had only accepted 76 per cent of the second excess layer risk. Proud wrote to Ellison informing him of these matters and saying that she had checked the underwriting file of Willis Corroon which revealed that the London insurers were correct and HIH held the 24 per cent. She wrote, referring to Brown:
“I assume that he knows he is on this layer and has merely failed to take this into account in his figures. Can we discuss before I contact him about it?”
Ellison replied that the London insurers were correct and that Brown had obviously forgotten and instructed Proud to contact him. She sent a memorandum to Ms Slack on 2^nd March 1998 in response to Brown’s memorandum. The memorandum included the following:
“A review of our file has confirmed that London underwriters only write 76% of the second excess layer with the remaining 24% being written by CE Heath.”
On 11^th March 1998 Slack wrote to Proud denying that HIH was on that risk. On 12^th March 1998 Proud sent to Slack a copy of the invoice of 18^th February 1992 which was prepared by Willis Corroon at that time and addressed to HIH for 24 per cent of the second excess layer but which, as has been mentioned, was not sent to HIH. On 23^rd March 1998 Slack wrote to Proud informing her that HIH did not have any record of that participation and asking if there was any policy documentation or a schedule on HIH’s letterhead indicating that it did underwrite the 24 per cent.
Slack said in evidence that Brown was away at this time and upon his return she mentioned the allegation to him. He appeared surprised and said that he had not underwritten the risk.
It is submitted by HIH that these events are a contemporaneous indication that HIH was not on risk. Brown would not have sought the contribution of costs for the second excess layer insurers to the extent that he did if he knew that HIH had participated at that level or if he had any doubt about it. Absent other evidence, I think this evidence has that tendency but it must be remembered that by this time the enormity of the judgment in the Duke action was known. Events before and after this incident establish, to my mind, that Brown did commit HIH to participation in the second excess layer. Slack said in her evidence that she had this conversation with Brown after she had undertaken a computer and manual search and found no documentation. She told him of the result of her searches and so he knew that documentation had not been found when he said that he had not underwritten the risk. Why Brown should write the memorandum of 18^th February 1998 in its terms is not easy to understand. I do not think he had forgotten about the participation of HIH. It is possible that he was embarking upon the state of denial in which he has persisted ever since. Whatever the reason, his memorandum and response to Slack cannot prevail over the considerable body of convincing evidence to the contrary.
Post judgment conversations with Ellison
After the correspondence about the reimbursement of costs which has been mentioned, Brown spoke to Ellison by telephone. Brown claims to have a memory of the conversation. He said he had conducted his own search of records of HIH and could find no record of having participated in the second excess layer. It was then that he spoke to Ellison and asked him to explain what had happened. Ellison asserted that he had placed the cover with him verbally. Brown said that he would not back date the cover. According to Brown, Ellison said he wanted to see Brown and talk to him about the matter. Brown agreed but said that Ellison must bring his underwriting file with him. Ellison remembers that the conversation took place but does not recall much about it. He said he could not recall Brown saying anything about backdating cover or having asked him to do so. He said that Brown could not have backdated the cover and that it was “not even feasible”. However, he does not doubt that Brown said HIH had no record of the cover. There is nothing else he remembers about the content of the conversation.
According to Brown, there was a meeting between the two men at his office. He said that he asked Ellison to show him any evidence that he had signed a placing slip. Ellison said he could not as there was no such document. Brown asked him if he had any notes on the file about any conversation between them about the risk. Ellison said there were none. According to Brown, the following occurred:
Brown said:“Well, Paul, I can tell you that I didn’t accept this insurance. I won’t accept this insurance.”
Ellison said: “Well, it looks like I’ve stuffed up”.
Ellison said that he could not recall such a meeting or conversation.
In my view, this evidence of Brown is revealing. He gave this evidence after Ellison had given evidence and had said he recalled the telephone conversation but very little of what was said and that he had no memory of the alleged subsequent meeting.
If it is to be assumed that the conversation occurred as alleged by Brown, two matters can be noticed. He was aware of the allegation of accepting the risk because of the earlier correspondence between Slack and Proud. He asked Ellison for documentation which, in itself, is understandable because anyone could be mistaken about an event alleged to have occurred over six years earlier. However, it was not until Ellison said that he could not produce any documentation, that Brown denied to him that HIH was on risk. Earlier he had only spoken about backdating, which I expect meant backdating cover. I think this is another example of Brown wanting to see if any documentary evidence existed before making the denial. The second matter to be noticed is that at no time did Brown say to Ellison, his close business colleague of many years standing, “But Paul I remember this matter well. I gave an indication of premium but you came back and told me it was too dear and you never spoke to me about it again”, or words to that effect. That is what is likely to have happened if any conversation as alleged by Brown had occurred in 1991 and if Brown believed that HIH was not on risk.
According to Ellison, he and Brown later met with representatives of BDO. Brown said at this meeting that there was a dispute as to whether HIH was on risk for 24 per cent of the second excess layer but that BDO did not have to worry because either HIH or Willis Corroon would have to pay so, in effect, they were not uninsured. Ellison made it clear in his evidence that he could not remember exactly what Brown said at this meeting. There is no suggestion in the evidence that Brown said on this occasion that Ellison had told him that BDO would not place the second excess layer because it was too dear. It might be said that nothing should be made of that matter because it was a meeting involving BDO and this sort of allegation could be regarded as inappropriate for such a meeting. However, having seen and heard Brown and his insistence that Ellison had told him that BDO had declined to proceed, I expect that if such a conversation occurred, he would have mentioned it to BDO.
Ellison said that he had various meetings and conversations with Brown after the initial denials and Brown always maintained that HIH was not on risk. Ellison said that over the ensuing two years he has had a number of conversations with Brown about this matter but not in depth. Ellison maintained that HIH accepted the premium and should be on risk. Brown maintained that he was not on risk. Ellison said that he and Brown agreed upon a likely sequence of events, namely that he had placed the second excess layer insurance with Brown orally and asked if he would front for Southern Cross and Brown agreed. He said that Brown, whilst acknowledging that this was what occurred, said that where Ellison fell down was in not producing documentation. Ellison said that Brown had never said that he agreed to be bound, but said that he could not remember such a conversation and the likelihood was that such a conversation was possible. I accept that evidence because it is plausible and I accept Ellison was a witness of truth. He could easily have fabricated his evidence by saying that Brown had specifically acknowledged that he remembered the conversation when he accepted the risk but he did not do so. I have had regard to the consistency of Brown’s denial that HIH did not accept the risk, but I do not regard that matter as of much significance because the denials were not expressed until after the lack of documentation was known and once made, persistence was likely. I think Brown developed increasing confidence in the denial in the absence of documentation.
Preparation by Brown for examination before Master
After judgment was given in the Duke action, the liquidator of Duke Group obtained orders pursuant to s596B of the Corporations Law. Brown was among those examined pursuant to such an order before a Master of this Court.
During cross-examination in these proceedings, Brown said that before he first appeared before the Master, he was not aware that he would be asked about whether HIH had participated in the second excess layer. He said that before he attended the examination, he thought that the purpose was that the liquidator of Duke Group was trying to obtain from HIH the costs of Duke Group in the Duke action because he thought Nelson Wheeler Perth and the partners of the other Nelson Wheeler firms would not be able to pay them.
Prior to 2^nd July 1998, the date of the first examination, HIH had instructed Minter Ellison solicitors in Adelaide and McCabes’ solicitors in Sydney to act for it, the former in relation to the examination and the latter in relation to whether HIH had participated in the second excess layer. I shall refer to this matter as the 24 per cent issue. Willis Corroon had instructed Freehill, Hollingdale & Page (“Freehills”) solicitors in Sydney. Mr McCarthy joined HIH in October 1991 and held the position of executive claims supervisor. In 1998 he was the technical claims manager during Slack’s absence. He assisted in handling the 24 per cent issue for HIH and on occasions when Brown was away overseas.
On 26^th June 1998 McCabes wrote to McCarthy about matters which are the subject of legal professional privilege and also about the examination of Brown before the Master on 2^nd July 1998. In that letter McCabes informed McCarthy that they had been informed by Phillips Fox that the purpose of the examination was two-fold, to investigate whether HIH accepted 24 per cent of the second excess layer and to obtain information to assist the Duke Group with an application for its costs of the Duke action against HIH.
This letter was shown to Brown in cross-examination. He was asked if he was aware of the information in the letter as to the 24 per cent issue before the examination. He said that he probably was, but he could not recall. He acknowledged that as the person to be examined, he probably saw the letter.
Brown said that he did not discuss the possible scope of the examination with HIH’s solicitors. He said that he did not discuss what he was likely to be asked because the view which had been reached was that the examination could be far ranging and he and his advisers had no idea what questions would be asked. He said that the predominant view was that the examination was about HIH pursuing “an action which we couldn’t win”, that is, defending the Duke action, and the liquidator trying to claim damages against HIH independently of BDO. Brown was then asked about his earlier evidence that he had no expectation of being asked about the 24 per cent issue and he agreed that it was untrue.
Brown acknowledged in cross-examination that he did have discussions with Mr Heinrich of Minter Ellison prior to the examination and accepted that one of these discussions would have occupied about an hour. He said that he assumed that they were about the examinations. He did not see that evidence to be inconsistent with his earlier evidence that he did not discuss preparation for the examination with his legal advisers.
Nelson Wheeler Perth submits that this evidence establishes that Brown is untruthful. I agree that it does. Brown said that he and HIH were extremely busy at the time as it was around the end of the financial year. That explanation may explain lack of memory about some matters but I do not think it can explain his contradictory evidence about whether he prepared for the examination with assistance from his solicitors and whether he was aware that the 24 per cent issue would be raised. There are no matters about which he claimed a lack of memory. He made positive assertions to the contrary of what the documents show and what he finally conceded. Whilst it may be said that these are not matters of considerable importance, they do indicate a lack of credibility on Brown’s part and in his style in giving evidence. I think he could see that his evidence to the Master was unhelpful and obstructive and he sought to explain that away by suggesting lack of knowledge of what was to be asked and lack of preparation.
Given a person of Brown’s background, training and responsibility in a matter of such importance in view of the amount of the Duke judgment, it is inconceivable that he would not prepare for the examination. Given that HIH had instructed Minter Ellison for the purpose of the examination, it is also inconceivable that Brown would not discuss matters with Heinrich in preparation for the examination. I reject Brown’s earlier evidence.
Knowledge of the premium having been paid
It will be remembered that records of HIH show that it received the premium for its participation in the second excess layer from Willis Corroon in March 1992 and that its own records establish that it was allocated to relevant insurance cover of BDO in September 1993 after Willis Corroon asserted that it related to the second excess layer and sent a copy of an invoice to that effect.
When Brown gave evidence before the Master, he was shown the memorandum from Proud to Slack of 12^th March 1998 and the attached invoice of 18^th February 1992 and the following occurred:
“QDo you agree that your company got the premium.
ANo.
QWhat searches have you made or caused to be made about that.
ANone.
QNone at all.
ANone at all.
QIt would be simple to make a check, wouldn’t it.
ANo, it would be quite complex.
QWhy.
ABecause it was at least seven years ago.
QWhy would it be complex. Isn’t it a matter of banking records.
AWe would have to find them. We are talking about the second largest insurance company in this country. I maintain I’m not on risk, so I’m not interested.
QThey have shown you your records, an ordinary business record, to indicate that you are.
AThat doesn’t indicate that to us at all.”
This passage of evidence was put to him in cross-examination at the trial and he was asked if that was the attitude he was adopting at the time. The following occurred:
“AExactly, because I believed then, and only recently have I discovered that we can actually reconstitute the old years ad hoc statements. I was unaware at that stage that we could do so.
QYou were being, I would wish to suggest to you, distinctly unhelpful so far as the liquidator’s counsel was concerned.
AI was answering the questions based on my knowledge at the time during that hearing.”
In the file of Minter Ellison, there is a note as follows:
“  26.6.98
1)     Think Willis Corroon paid HIH for the premium. Never reconciled.
         Only raised when we asked for costs recently.
3)     Need to talk later about examination.
         I’ll call next week.”
I understand that another part of this note has not been produced because of legal professional privilege. There is another file note for 30^th June 1998 which includes, “I say I’ll call tomorrow about the hearing here”. On 1^st July 1998 there is a note in the solicitor’s file of a conversation between Brown and Heinrich which contains the following:
“3)24%          Each month we get a full statement from Willis Corroon. Ellison says they can track down their bank records showing they paid us.”
All of these conversations were between Brown and Heinrich.
Brown was asked about what he had told the Master and the file note of 26^th June 1998 was put to him. He said he did not remember this conversation. He went on to say that before he was examined before the Master, Ellison had told him that he would demonstrate that Willis Corroon had paid the premium. He said:
“It occurred to me if they were prepared to say that there was a prospect, that they probably did pay the premium. But it certainly hadn’t been proven to my satisfaction.”
Brown was asked about the note of the solicitor on 1^st July 1998. He said he could not recall any such conversation with Ellison. He said it was not a big issue in his mind, but he agreed that it was consistent with what Ellison was telling him by this time. He said that his evidence to the Master was correct because it had not been proved to his satisfaction that HIH had received the premium and further the memoranda and the invoice referred to 24 per cent which was beyond HIH’s capacity. In cross-examination he agreed that documents shown to him did establish that the premium had been paid.
I do not think Brown was truthful in answers he gave to the Master. Despite his assertion to the contrary, I am satisfied that he was aware that records existed which would show whether or not the premium had been paid. He could have no reason to doubt those records. He had told the solicitor of his real state of mind which was, in my view, that the premium had been paid. His answers about this matter in his evidence at the trial lack frankness. I formed the view that Brown was being deliberately obstructive before the Master. He was well aware that the 24 per cent issue would be raised during his examination. He knew that relevant records were not only banking records but also internal records of HIH.
However, his failure to mention the “too dear” conversation is of even more significance. Brown was well aware of what counsel for the liquidator was trying to ascertain. If his assertion as to the conversation with Ellison in 1991 was true, he could simply have repeated that conversation to show that HIH was not on risk. Regardless of the questions he was asked, he could have assisted the liquidator in that way. He is an intelligent man. Perusal of the transcript of the examination reveals that he was assertive and put his position about matters when appropriate.
Response to the Freehills letter
By the middle of 1998 Freehills and McCabes were corresponding regarding the 24 per cent issue. There is nothing in the files of McCabes or Minter Ellison to suggest that Brown had said anything about the alleged statement by Ellison that the proposed premium for the second excess layer was too dear.

Upon Slack being absent on leave in 1998, McCarthy took over the management of the Duke claim. I accept that his section was very busy in that year. He was responsible for about 600 to 800 substantial claims.
On 15^th June 1998 McCarthy wrote to McCabes and instructed them to inform Freehills that Willis Corroon was responsible for the 24 per cent of the second excess layer and costs. On 17^th June 1998 there was a discussion between members of McCabes and Freehills in which it was said that Willis Corroon maintained that the 24 per cent was placed with HIH and McCabes wrote to HIH informing it accordingly and of the fact that Freehills were seeking documents which would confirm that allegation. Correspondence between the solicitors continued.
On 15^th July 1998 Freehills wrote to McCabes again asserting that HIH was on risk for the 24 per cent of the second excess layer and set out reasons for that assertion, some of which have been mentioned in these reasons. Freehills enclosed various documents to support the allegation, including a cover note from Southern Cross, documents showing payment of the premium to Southern Cross, invoices addressed to HIH dated 25^th February 1992, 1^st November 1991 and 18^th February 1992, but not sent to HIH, documents showing payment of the premium to HIH and computer ledger records of Willis Corroon showing the premium. There are notes in the file of McCabes which indicate that these documents were considered on 17^th July 1998. The examination of Brown before the Master resumed on 22^nd July 1998.
It appears that the existence of documents evidencing participation by HIH in the second excess layer was regarded as important. In the file of McCabes, there is a note of a telephone conversation with McCarthy on 20^th July 1998:
“T/a McCarthy.1
Greg
Went well in the box. No documentation.”
McCarthy acknowledged that these are matters which Brown would have said to him. Earlier in these reasons I made the observation that Brown wanted to see documents before making the allegation of not being bound to 24 per cent of the second excess layer. I think this file note is a further indication that he had that view. However, he did not give evidence about the file note or the subject matter of it.
McCabes wrote to Freehills on 27^th July 1998 indicating that they were far from satisfied that the documents supplied by them demonstrated the assertion of Willis Corroon about the second excess layer. The letter went on:
“However, HIH is willing to give further consideration to the matters set out in your letter if your client is able to provide information/particulars of utility. Your client refers to conduct/representations by HIH but does not identify who at HIH engaged in the conduct alleged. Therefore, please provide us with further and better particulars of the matters contained in your letter.”
McCabes proceeded to elaborate upon the particulars they required.
Copies of the letter of 15^th July and the documents sent to McCabes by Freehills were sent to HIH on 28^th July 1998.
Brown was away overseas at that time until 17^th August 1998 and did not provide instructions as to Freehills letter and the documents until after his return. On 2^nd September 1998 Brown gave those instructions to McCabes by letter. He wrote that Willis Corroon rejected the first offer of cover and was consequently under an obligation to approach HIH again to see if it would participate in a new proposal and it did not do so. He said he was unaware of the involvement of Southern Cross which was arranged by Willis Corroon without the knowledge of HIH. He went on to point out the absence of certain essential documentation. He said that Willis Corroon paid Southern Cross direct. He rejected any significance in the invoices addressed to HIH. He said that HIH had no doubt that BDO paid premium to the broker who paid it to HIH. That assertion is to be contrasted with the answer which he gave the Master on 2^nd July 1998 which has been mentioned. He asserted in the letter that the premiums were paid by the various member offices of BDO separately with a resultant myriad of accounting entries produced by Willis Corroon which bore no resemblance to the single premium entry on the main policy which HIH issued. That is the effect of what he wrote. He went on to say that it would have been totally impossible for HIH to reconcile the documentation. The letter concluded:
“In summary therefore, the letter from Freehills is a futile attempt at justifying a gross error perpetrated by the broker. Our position must be to maintain denial of any participation in that program.”
It will be seen that Brown made no mention of the alleged conversation wherein Ellison said that the premium was too dear. Also, as is plain from the evidence adduced at this trial, the payment of the premium was not in separate amounts from individual BDO firms and could have been identified if enquiries had been made. It seems that the documentation sent by Freehills was simply dismissed by Brown. I accept that by this time Brown was confident in his denial that HIH participated in the second excess layer because no document of HIH had been produced indicating the contrary. However, given the importance of the 24 per cent issue and that the matter was in the hands of solicitors, it is difficult to understand why Brown would not have mentioned his conversation with Ellison in 1991 if it occurred. This failure to do so is cogent evidence that no such conversation occurred.
Also, the approach of informing Freehills that HIH was willing to give further consideration to the 24 per cent issue if Willis Corroon provided further information is surprising if HIH had not participated in the risk. Brown acknowledged in his evidence that if anyone in HIH knew if HIH had participated it was him. As has been seen, he claimed that there had been no such participation. The question naturally arises as to why HIH, through McCabes, would give Willis Corroon the opportunity to provide further information or particulars. It suggests that HIH was attempting to draw out from Willis Corroon everything possible so that if there was no such documentation, the denial could be maintained.
Brown acknowledged that the “too dear” conversation with Ellison back in 1991, if it occurred, was a “knock-out punch”, however HIH gave a further opportunity to Willis Corroon to produce documents because that was part of the recommended strategy developed with McCabes. He said that he did not want to go further into that strategy because of legal professional privilege.
Of course, Brown is entitled to maintain the privilege and the existence of such a strategy could not be explored, but it is an attitude which is also consistent with a strategy of seeing what Willis Corroon could produce so as to see if the position of denial could be maintained. Such a strategy would not be consistent with knowledge that there was no participation.
Other Matters
I mention one other matter about the failure of Brown to mention his alleged conversation with Ellison in 1991. Even on his own story, he knew of the allegations that HIH had participated in the second excess layer when told by Slack in March 1998. His explanation for not mentioning the alleged conversations with Ellison before is that it did not come to his mind. I reject that explanation. Having observed Brown in the witness box over some days, I consider him to be a person who would advance any argument or response which would suit his case, particularly if it was true. The fact that he did not do so indicates that Ellison did not say what is attributed to him and it is a fabrication by Brown to suit HIH’s case.
The last matter I mention is that Brown did not mention that HIH was not on risk with respect to the second excess layer during the course of the trial of the Duke action. It was known from the outset that the claim exceeded the total of the layers of cover. It may be suggested that if Brown wanted to avoid liability with respect to the second excess layer, he would have denied participation at an earlier stage and his not doing so indicates that he did not believe that HIH was on risk. I do not regard this matter as supporting the case of HIH. During the trial, advice in writing of Phillips Fox and counsel given to HIH was admitted into evidence. It is unnecessary to mention this advice in detail. It is sufficient to say that at no time was HIH advised that the liability of Nelson Wheeler Perth and the other defendants would exceed the primary and first excess layers. Having considered this evidence and the evidence of Brown, I do not think he ever considered that there would be judgment in the Duke action in an amount which would activate the second excess layer. Consequently, this is not a matter of significance.
Conclusion
For the reasons which I have given, I reject the evidence of Brown that HIH did not participate in the second excess layer. That finding does not, in itself, prove that it did. However, I accept the evidence of Ellison whom I found to be a truthful and reliable witness. Although he could not remember most conversations and incidents, including those in 1991 relating to the participation of HIH in the second excess layer, I accept his evidence as to what he would have expected to have occurred. I also accept that the vast body of other evidence, particularly documentary evidence, leads to the conclusion that he did place the 24 per cent of the second excess layer with HIH and the balance in London as indicated in the various documents which have been mentioned and that Brown personally accepted that risk orally. At no time was that risk rejected by HIH or Brown. BDO paid the premium to HIH through Willis Corroon which was retained by HIH. Southern Cross is on risk as a re-insurer to the extent which has been mentioned. Whilst Southern Cross is not a party to this action, it has, as has been mentioned, accepted that it is on risk if HIH participated in the second excess layer as alleged. This is not a case of inferring the existence of a contract from proven facts and circumstances. The evidence of Ellison and the existence of documents brought into existence in and after September 1991 establish the existence of the contract. This evidence establishes that Brown, on behalf of HIH, offered to accept participation in the second excess layer to the extent of 24 per cent, fronting for Southern Cross as re-insurer for $2.2m, at the appropriate proportion of the total premium of $50,000 for the layer and that Ellison of Willis Corroon, as agent for BDO accepted that offer.
I find that there is a valid contract of insurance between BDO and HIH for that 24 per cent of the second excess layer with that re-insurance. The period of the insurance pursuant to that contract is from 1^st September 1991 to the 30^th June 1992. There is a reference in some documents to an expiry date of 1^st July 1992 but that is a matter of no consequence for present purposes. The insured is BDO and its members, the plaintiffs Martino, Messer and Munachen, are entitled to be indemnified by HIH to the extent of 24 per cent of the second excess layer. In consequence, benefit of the contract enures to Nelson Wheeler Perth.
As has been mentioned earlier, this contract of insurance is in the same terms as the primary layer. It is a “follow form” contract, as understood by the insurance industry, which means that it incorporates the wording of the primary policy. That is the effect of the evidence of Hoffman and is as described in Permanent Trustee Australia & Anor v FAI General Insurance Co Ltd (1998) 44 NSWLR 186 at 222.
Having reached these conclusions, it is unnecessary to consider the other causes of action against HIH in equity and pursuant to the Trade Practices Act and the Fair Trading Act. The counterclaim of HIH has not yet been considered. It is inappropriate to do so until the appeal of Nelson Wheeler Perth to the High Court in the Duke action is resolved. If that appeal is resolved in a particular way in favour of Nelson Wheeler Perth, the counterclaim may not have to be considered. I shall hear the parties as to the judgment or orders, if any, which should be made against HIH at this stage.
The case against Willis Corroon
I now turn to the case against Willis Corroon. Undoubtedly there was a contract of retainer between BDO and Willis Corroon. The terms of the contract were to procure for their benefit a second excess layer of cover of $30m on the same terms and conditions as the primary layer policy, including defence costs. It is beyond question that Willis Corroon, through Ellison, was in breach of its duty to BDO by reason of not ensuring that there was appropriate documentation of the participation of HIH in the second excess layer. Willis Corroon was under a duty to obtain and pass on to BDO that policy documentation and had it done so this litigation would probably have been avoided. I did not understand Willis Corroon to contest that it was under such a duty. The duty owed by Willis Corroon to BDO is the same duty in contract as in tort. I find that Willis Corroon was in breach of that duty. Nelson Wheeler Perth are entitled to such damages as flow from the breach of that contract or from the breach of duty in tort. These damages cannot include the amount due to Nelson Wheeler Perth pursuant to the contract of insurance which I have found Willis Corroon did place with HIH. It was not in breach of its duty in that regard. However, it is claimed that Nelson Wheeler Perth have incurred loss by reason of the breach of duty of Willis Corroon which is not, or may not be, recoverable from HIH. That loss is yet to be quantified which can be undertaken if necessary.
As is the case regarding HIH, it is unnecessary to consider the other causes of action brought against Willis Corroon in view of the findings which I have made.
It remains to consider whether the causes of action against Willis Corroon in contract and tort are statute barred. There was extensive argument about that matter. It would assume greater importance if I had found that HIH did not accept the contract of insurance for 24 per cent of the second excess layer. In that case Willis Corroon would have been faced with a very substantial claim for damages of $7.2m and a proportion of defence costs incurred in the Duke action. However, there is no such liability. The quantum of any damages to be awarded against Willis Corroon is to be based upon any loss to Nelson Wheeler Perth caused by the breach of contract and tort of Willis Corroon which may well be limited to their costs of this litigation which cannot be recovered from HIH. At this stage, it is not known if there is such a loss as the issue of costs against HIH has not yet been resolved.
I defer further consideration of the case against Willis Corroon until the case against HIH has been completed and all issues of costs resolved.

[2000] SASC 299

6 September 2000