Russell Young Abalone Pty Ltd v Traders Prudent Insurance Company Limited
[1991] TASSC 94
•23 October 1991
87/1991
List "A"
COURT: SUPREME COURT OF TASMANIA
CITATION:Russell Young Abalone Pty Ltd v Traders Prudent Insurance Company Limited [1991] TASSC 94; A87/1991
PARTIES: RUSSELL YOUNG ABALONE PTY LTD
v
TRADERS PRUDENT INSURANCE COMPANY LIMITED
FILE NO/S: 2807/1984
DELIVERED ON: 23 October 1991
JUDGMENT OF: Cox J
Judgment Number: A87/1991
Number of paragraphs: 32
Serial No 87/1991
List "A"
File No 2807/1984
RUSSELL YOUNG ABALONE PTY LTD
v TRADERS PRUDENT INSURANCE COMPANY LIMITED
REASONS FOR JUDGMENT COX J
23 October 1991
This is a claim for damages arising out of the refusal of the defendant company to indemnify the plaintiff company pursuant to a policy of insurance against damage by fire. The following statements of fact may be taken to be my findings unless otherwise indicated.
In about July 1981 the plaintiff, a private company which is the trustee of the Russell Young Family Trust, a discretionary trust of which Mr Russell Young and members of his family are beneficiaries, purchased a property No 340–342 Murray Street, Hobart for $37,500.00. Mr Young is a director of the plaintiff company and its principal agent in terms of day to day decisions. The property was let in two flats at the time of the purchase, and Mr Young intended that the company should retain it as a long term investment as residential flats. The purchase price was $37,500.00 and included in the sale were some carpets, curtains, blinds, light fittings, stoves and refrigerators. The company borrowed $22,000.00 on first mortgage to complete the transaction. The transfer attributed, for stamp duty purposes, a value of $35,000.00 to the realty. The company's insurance brokers prepared a proposal and submitted it to the defendant seeking to have the building insured for $40,000.00, contents for $5,000.00 and loss of rent for $3,120.00. The proposal disclosed that the building consisted of conjoined residential flats and that it was not in the sole occupation of the proponent, its "family or servants", but was let to tenants. A policy was issued by the defendant covering the period 6 July 1981 to 6 July 1982. This policy was renewed the following year and expired on 6 July 1983.
On 26 July 1983 the plaintiff's broker prepared a fresh proposal. The form used was a "Home Insurance Proposal For Private Dwellings – Buildings andor Contents". Cover was sought for $40,000.00 on the buildings and $5,000.00 for the contents. No mention was made of loss of rent, but a question, "Is any part of the building let to tenants?", was answered in the affirmative. The declaration, signed by the broker on the plaintiff's behalf, said so far as is material:
"I/We declare that
.....
2 I/We will advise of any changes materially varying any of the facts or circumstances existing at the date of this application.
3 The dwelling is occupied solely by myself/ourselves and family (no business is carried out therein) and will be maintained in a good state of repair.
4 That all the answers given herein are in every respect true, correct and complete and I/We have not withheld any information likely to affect the acceptance of this proposal.
5 This proposal and declaration will be the basis of the contract between me/us and Traders Prudent Ins Co Ltd and will be incorporated in the policy document and I/We agree to accept the terms, conditions and exceptions of this Policy of Insurance."
On or about 15 August 1983 a home insurance policy was sent by the defendant to the plaintiff care of its accountants. It noted the plaintiff and its first mortgagees, Messrs VR Smith and C R Leslie, as the insured. The policy contained a provision that the written proposal should be the basis of the contract of insurance and be considered as incorporated therein. The defendant company undertook to indemnify the plaintiff against loss of or damage to the buildings insured occurring during the period of insurance which extended from 6 July 1983 to 6 July 1984 caused by Defined Events which included fire:
"Provided that
1 The Company will pay to the insured the value of the buildings at the time of loss or damage or at its option reinstate, replace or repair subject always to due allowance for wear, tear, depreciation or betterment."
It also contained a provision indemnifying the plaintiff against loss or damage to the contents insured caused by fire, and one to the effect that the indemnity in respect of the defined events "shall be entirely suspended as from 4.00pm local time on the sixtieth day for any period in excess of sixty (60) consecutive days during which time the Buildings are left without a permanent occupant or not fully furnished for normal habitation therein unless with the written consent of the company".
On 10 September 1983 fire, started it would appear by a trespasser, caused considerable damage to the premises and rendered both flats uninhabitable. The plaintiff claimed indemnity under the policy. On 29 February 1984 the defendant's solicitors wrote to the plaintiff's then solicitors stating that their client declined to meet the claim, and after adverting to declarations numbered 2, 3 and 4 in the proposal set out above and to the clause suspending the indemnity in the event of the premises being unoccupied for sixty consecutive days without the consent of the defendant, continued:
"It now appears that it was never the intention of your client namely, Russell Young Abalone Pty Ltd, to occupy the building and that at all times it was proposed that the buildings would either be left vacant, or let to tenants. It is clear that when the insurance proposal was issued that in fact the premises at 342 Murray Street had been vacant since February 1983 and that it was known that the premises at 340 Murray Street would be vacant shortly after the date of the proposal. There is also evidence available to our client which would suggest that the premises at 340 Murray Street were possibly vacant at or about the time that the proposal was completed. Furthermore, there is evidence available to our client that would show that it was the intention of your client not to relet the premises because of the intended redecoration.
Had our client been aware of the true factual situation that existed at the time the proposal was completed and furthermore, had it been informed of your client's intentions in respect of redecoration of the premises, then the proposal would not have been accepted.
Furthermore, your client failed to comply with the declaration that it would advise of any changes materially varying any of the facts or circumstances existing at the date of this application when it embarked on extensive renovations of the premises.
Our client also relies upon the non–occupancy clause above referred to."
On 5 October 1984 the plaintiff issued a writ with Statement of Claim annexed claiming that the defendant "has neglected or refused to indemnify the plaintiff under the policy of insurance abovementioned and the plaintiff has thereby suffered loss and damage". The plaintiff claimed general damages to be assessed. By its defence the defendant relied on the alleged material non–disclosures at the time of the proposal and the allegedly false representation that the dwelling would be occupied by the plaintiff solely (sic) claiming that the policy was null and void and of no effect. In the alternative, if the policy was not null and void, it relied on an alleged breach of the condition that the plaintiff would advise of any material changes, upon the suspension of the policy by virtue of the sixty day non–occupancy clause, breach of warranty to maintain the premises in a good state of repair, and upon an alleged breach of condition that the plaintiff would take all reasonable precautions for the safety of the building in that it left each of the flats vacant for the purpose of renovations without ensuring that the buildings were in any way protected from the entry of unauthorised persons and left inflammable substances in the form of paint and paint thinners in the premises which were able to be used by persons unknown for the purpose of burning the premises.
The plaintiff company did not have sufficient funds available to repair the damage and to make the premises inhabitable and after receiving an Abatement Notice from the Hobart City Council, sold the property in its damaged state in February 1985 for $30,000.00. The new owner expended a considerable amount of money (over $70,000.00) restoring it and converting it into three flats.
After the plaintiff first purchased the property it was let in two flats, an estate agency collecting the rents and attending to minor repairs from time to time. Although having two street numbers, two front doors and a wooden picket fence running from about the middle of the front verandah of the house to the gateway to the property, the property was comprised in a single title and the policy covered the entirety of it. It consisted of two storeys built in brick with a rear section, partly two storeys high and partly only one storey high, built of weatherboard. The flat known as No 340 Murray Street was considerably larger than that known as No 342 Murray Street. It occupied a little more than half the ground floor containing thereon (from front to rear) a passageway with timber stairs to the upper floor, a living room, bedroom, kitchen, bathroom, laundry and outside toilet. Upstairs it comprised a landing leading onto the front verandah, the two bedrooms which faced thereon, and a third bedroom to the rear of the front left room. The other flat had the same number of rooms and passages on the ground floor, but these occupied less than half the total ground floor (possibly three–eighths judging by the photographs put in evidence), and upstairs had only one bedroom, that being situated to the rear of the front right room. The bedroom occupied by the last tenant of No 340, Mr Grattidge, was that front right room which was directly above the front portion of the ground floor occupied by the other flat. Initially the flats were let for $60.00 and $40.00 per week respectively.
In September 1982 the flat at No 342 Murray Street became vacant. At the time Mr Russell Young decided not to relet it immediately, but to repaint it and to effect some relatively minor repairs. He also planned on effecting the same sort of renovations to No 340 Murray Street, but being an abalone diver earning high returns and often working long distances from Hobart, did not get round to making a start on either flat until shortly before the end of July 1983 at about the time his broker submitted the proposal form. About the end of June 1983 he spoke to the tenant of No 340, whom he knew, and asked him to vacate. Mr Grattidge agreed to do so as soon as he had alternative accommodation. Mr Young engaged three men, who were then unemployed, to assist him in the work. The property was not in a dilapidated state as submitted by the defendant, but it was in need of cleaning up and of some repairs. The garden was overgrown, but although the front part of No 340 was in good order, the back section was quite dirty and the walls in the kitchen and bathroom were grubby. The flat needed repainting, but no structural work was needed. Possibly one wall panel needed fixing. No 342 also needed repainting, the bathroom needed a new piece of board along the top of the bath and there was a sheet of plaster loose and which had sagged at the join some 4"–5". The house was an older style house of modest value, as its purchase price indicates, and with old fittings, but I find that it was substantially in a good state of repair and that at no material time could it be said that the plaintiff was in breach of the warranty to maintain it in a good state of repair.
On 1 August 1983 Mr Young and one of the workmen, Mr Pullen, went to inspect the premises and found that No 340 was still occupied by Mr Grattidge. They returned a week later and put in the day cleaning up the garden and backyard and removing rubbish to the tip. A week later on 15 August Mr Young, Mr Pullen and two further men named Quinn and Grant visited the premises and the work in the garden was completed. Mr Young visited a paint store and purchased the necessary paint, brushes and thinners, the bulk of which he stored at his own home, thereafter delivering what was needed to the premises in Murray Street from time to time. That day he saw Mr Grattidge in the street and was informed by him that he had moved out most, but not all, of his belongings. I find that Mr Grattidge continued to occupy the premises at No 340 Murray Street until 13 August 1983 when he found accommodation with his brother. He left some furniture, bedding and toiletries in the premises and spent the night there approximately twice a week until about the end of August. Some of his belongings were still there when the fire occurred on 10 September 1983.
Between 15 August and the date of the fire the three workmen worked intermittently on the premises. By the time of the fire all the sanding, painting and maintenance works in No 340 had been completed and in the second flat all the ground floor painting had been done and they had started but not completed painting the stairwell and upstairs bedroom. I find there were two or three more days' work needed to complete the job. The premises would have been inhabitable again well within sixty days of Mr Grattidge's departure from the premises on 13 August. At the time of the fire there was some paint and thinners on the premises, but the evidence does not permit a finding of what quantities were involved. The plea of failing to take proper precautions in so far as it is based on the leaving of inflammable substances on the premises is not made out. Nor, in my view, has that plea been made out in so far as it relies upon the failure of the plaintiff to ensure that the buildings were protected from the entry of unauthorised persons. There was no evidence as to how the supposed intruder who lit the fire had gained entry. True the plaintiff engaged no night watchman nor took any special precaution in way of additional locks, burglar alarms or the like, but in my view it has not been established that the taking of such measures was reasonably required of the plaintiff. The premises were locked up each time the workmen and Mr Grattidge left, and although Mr Grattidge's visits were not anticipated by the workmen and one of them, seeing evidence of nocturnal occupancy which was in fact caused by Mr Grattidge, suspected that trespassers might be gaining entry, there was no sign of forced entry observed by him and no evidence in the course of the trial that a trespasser had entered prior to the night of the fire. There was evidence which showed that quite a number of people had occupied the premises at No 340. Two other persons had shared the flat with Mr Grattidge until shortly prior to his vacating it, each of them had a key and Mr Grattidge did not know what had become of those keys. He had moved in the previous September and said that over the period he lived there "quite a few other fellows, a few footballers around the place, all rented it at different times and for a bunch of bachelors you couldn't fault it". He said the walls probably needed painting, but after they had "put 2,500 beer bottles around the walls we didn't notice it after that". I think it can fairly be concluded that prior to the departure of Mr Grattidge the premises at No 340 were the scene of considerable activity, and the fact that the smaller flat was not occupied would not be readily apparent to the casual observer. Mr Grattidge also had a dog there for some part of the time. He said he had not been given back keys by any of the former tenants he knew to have had them when in residence, but I am not prepared to infer that they were not returned to the estate agent and even if they were not, there is no evidence suggesting that the ultimate intruder was one of them or had somehow got hold of a key from one of them.
I can also dispose of the defendant's plea which relies upon the sixty day non–occupancy clause as Mr Gunson formally conceded on the defendant's behalf that he could not rely on the plea. The only plea other than those which assert that the policy is null and void for material non–disclosure or false representation is that the plaintiff is in breach of a condition that it would advise the defendant of any changes materially affecting any of the facts or circumstances existing at the date of the application by the plaintiff to the defendant by the proposal for insurance of the premises. The defendant relies on the failure of the plaintiff to advise that upon No 340 Murray Street becoming vacant after the date of the proposal, it had been vacated and that it was the intention of the plaintiff to keep those premises vacant for the purposes of renovation. The materiality of those facts can be considered along with the materiality of the facts not disclosed at the time of the proposal as they are of the same character.
Before considering these matters, it is convenient to deal with the plea of false representation. It is pleaded in this form:
"12Further the defendant says that in the proposal of insurance made by the plaintiff to the defendant and dated the 26th day of July 1983 the plaintiff advised the defendant that the dwelling (the subject of the proposal and policy of insurance) would be occupied by the plaintiff solely.
13The aforesaid representation to the defendant by the plaintiff was false and known to the plaintiff to be false at the date of the proposal.
14In the premises the defendant says that the policy of insurance is null and void and of no effect."
It is based on the declaration in the proposal:
"I/We declare that
...
3 The dwelling is occupied solely by myself/ourselves and family (no business is carried out thereon)..."
I have already pointed out that the original proposal disclosed that the building consisted of conjoined residential flats, that it was not in the sole occupation of the company, its "family or servants" and that it was let to tenants. The defendant company well knew before receiving the proposal of 26 July 1983 that the property had until that time been so occupied, and the latter proposal also contained an affirmative answer to the question, "Is any part of the building let to tenants?" There could not possibly have been any confusion in the mind of the defendant's proper officers or belief that this property was to be solely occupied by Russell Young Abalone Pty Ltd and its "family". In fact, the manager of the defendant company, at the time the company issued the policy and later repudiated liability under it, acknowledged in evidence that the proposal form used was appropriate for the situation where the owner used it as two flats for commercial purposes without the proposer being resident. Quite clearly the incorrect statement, if it can be called a misrepresentation when considered in the context of an earlier statement in the same proposal that a part of the building was let to tenants was not one which induced the defendant to enter the contract. This plea is not made out.
The case so far as liability is concerned is thus reduced to two short questions: were either of the facts that No 342 had been vacant since the previous September and that the whole property was at the time of the proposal intended to be left vacant for a period of less than sixty days for the purposes of repainting and minor renovations material facts which should have been disclosed to the insurer? and was the fact that the whole property was left without a permanent tenant from 13 August a change materially affecting any of the facts and circumstances existing at the date of the proposal of 26 July 1983?
The test of materiality was stated by Samuels J (as he then was) in Mayne Nickless Ltd v Pegler (1974) 1 NSWLR 228 at p239 in these terms:
"I do not think that it is generally open to examine what the insurer would in fact have done had he had the information not disclosed. The question is whether that information would have been relevant to the exercise of the insurer's option to accept or reject the insurance proposed. It seems to me that the test of materiality is this: a fact is material if it would have reasonably have affected the mind of a prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions."
This statement was accepted as appropriate by the Privy Council in Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd [1976] 2 Lloyd's Rep 631 and by the Court of Appeal in England in CTI Inc v The Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd's Rep 476. It is not however without ambiguity as Kirby p pointed out in Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514 at p517 where his Honour said:
"... What is the meaning of 'affected the mind' of a prudent insurer? Is a broad view to be taken that something 'affects' the mind when it is taken into account to define an issue and even when it is discarded as irrelevant? Is that the 'effect' to which Samuels J was referring? Or is the effect on the mind limited strictly to those considerations which will ultimately determine whether or not the insurer will accept insurance and if so at what premium and on what condition?
For a number of reasons, even if the Court is not formally bound, by virtue of a governing decision of the Privy Council, to apply the test as stated by Samuels J in Mayne Nickless Ltd v Pegler, I would choose to do so. I would certainly prefer the test so stated to the less stringent one expounded by Kerr LJ in Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd's Rep 476. Furthermore, I would read the test in Mayne Nickless Ltd v Pegler to require that the effect on the mind of the insurer, to which Samuels J was referring, should be something more than the effect produced by information which the insurer would have been generally interested to have. If, though interested to have it, such information would not, in the end, have determined for a reasonably prudent insurer the acceptance or rejection of insurance, the setting of the premium or the attachment of conditions, there is not such effect on the mind as requires disclosure by the insured. The information, although of interest, is not material. As such it is not information which must be disclosed by the insured."
The learned President then advanced a number of reasons for his preference. Glass JA reached the same conclusion. At p523 he said:
"... The only discordant note is sounded by Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd's Rep 476 in which Kerr LJ said (at 492):
'... To prove the materiality of an undisclosed circumstance, the insurer must satisfy the Court on a balance of probability – by evidence or from the nature of the undisclosed circumstance itself – that the judgment, in this sense, of a prudent insurer would have been influenced if the circumstance in question had been disclosed. The word "influenced" means that the disclosure is one which would have had an impact on the formation of his opinion and on his decision–making process in relation to the matters covered by s 18(2).'
The difference it seems to me between the two views is whether the relevance of the hypothetical facts, assuming they had been disclosed, is judged at the moment the underwriter is deciding whether or not to accept the risk or at the moment when he undertakes an investigation of the risk. The former is the Mayne Nickless Ltd v Pegler view and is binding upon us. The latter advanced in Container Transport International is not binding on us and should in my view be disregarded."
The third member of the Court, Priestly JA also agreed.
These views do not detract from the fundamental proposition recognised by Lush J in Darrel Lee (Vic) Pty Ltd v Union Assurance Society of Australia Ltd [1969] VR 401 at p404 that:
"In making out the relevant part of (the defence of non–disclosure) 'it is not necessary for the insurers to prove that they would have acted differently if the fact had been disclosed; it is sufficient for them to establish that the fact, if known, might have induced reasonable insurers to decline the risk or increase the premium': McGillivray on Insurance Law 5th edn., vol.l, p893."
The defendant called its former manager, Mr Trevor Young to give evidence on the issue of materiality. In Babatsikos v Car Owners Mutual Insurance Company Ltd [1970] VR 297, Pape J at pp305–306 said:
"Although the case has established that the evidence of experts other than the parties may be given, it is less clear that the insurer himself, or if it be a company, the officers of the company, are entitled to give evidence as to the practice of the insurer in regard to a particular class of risk, for the question is (as is pointed out in the passage from Hallsbury to which I have just referred) not what the particular insurer would regard as material, but what a prudent insurer would so regard and it does not always follow that a particular insurer is necessarily a prudent insurer. There would seem to be little doubt that an officer of a defendant company (if he were qualified to do so) could give evidence of the general practice of other insurers, and in Dalgety & Co Ltd v AMP Society [1908] VLR 481 Cusson J, was disposed to think that he could. But the learned judge thought that such officers of a defendant ought not to be allowed to state that a particular representation or non–disclosure by the assured was material to the risk they were invited to insure against. Nevertheless there are statements in Australian cases which support the view that they may do so ...
These cases seem to establish that upon the issue of materiality evidence may be given by the defendant as to its practice. But although such evidence is admissible as part of the circumstances existing at the time of the proposal, it does not of itself establish materiality, although it may assist the tribunal of fact to come to a conclusion on the issue."
Mr Young has been in the fire and general insurance industry for about 18 years, for 13 of which he has worked as an insurance broker. He started his working career with 12 months as a junior clerk in the insurance company "Mercantile Mutual". He then had five years with a broker "Baillieu Bowring". This was followed by one year as agency supervisor for "National Mutual" and one year as an underwriter with "Commercial Union". He then had a year in Adelaide with the broking firm, "Sedgwick James" and returned to Tasmania as manager of the defendant between 1982 and 1984. Since then he had worked for "Sedgwick James" as a broker. He is an Associate of the Insurance Industry of Australia and an Associate of National Insurance Brokers Association of Australia. With due respect, I think his level of expertise in the assessment of risks by underwriters has not been shown to be extensive and his evidence, though no doubt honest, was not impressive. He was unable to identify and articulate the reasons why he claimed the factors he relied upon were material. His evidence–in–chief was in substance as follows:
"QWhat factors did Traders Prudent Insurance Company look for when deciding whether or not to accept a proposal for premises such as a house or flats?
AWe would look, I guess, at the locality and what the property was being used for, in other words we would expect that it would be occupied.
...
QHad the company known that the flat at 342 was vacant when the proposal was put to it, would the company have accepted the proposal?
ANo we wouldn't have accepted the proposal.
QAnd why not?
ABecause it wasn't our company's intention to insure unoccupied dwellings.
...
QAnd why would you not insure unoccupied premises?
AWe classed them as a much, in our opinion at a much higher risk, and consequently we don't wish to – or at that stage we didn't wish to insure those unoccupied premises.
...
QIf it had been proposed to you at the time that the proposal was given that the – it was the intention of the insured, or the proposer more correctly, to renovate both the flats and that would mean that they would both then be empty for some indefinite period for the purpose of repainting, decorating, for minor renovations, would the company have accepted the risk?
ANo we would've declined the risk under this proposal.
QBecause of the danger or the risk?
AYes we don't, I mean the fact that it's unoccupied and also the fact that it's having renovations done to it as well.
QRight, and would you have expected the insured to have advised you that the premises were empty if they became empty at any stage for the purpose of renovations?
AWe would have expected them to advise us.
QIn those circumstances what would the company have done if it had been told by the insured that the premises were vacant and would be vacant for some weeks for the purpose of renovations. What options were open to the company?
AWhat, assuming we were on risk at the time do you mean?
QYes.
AWell we could have – I guess we could have cancelled the policy, that's probably what we would have done I guess.
...
QCould I ask you this, is the area in which a particular premise is situated an important factor in determining the risk it might run or flow to the company as a result of insuring those premises?
AWe certainly take the locality into consideration and overall underwriting of a risk.
QYes. And the upper end of Murray Street in North Hobart, how was that regarded as a risk area or suburb so far as your company was concerned in 1983?
AIn 1983 it was probably regarded as a higher risk than perhaps some of the others.
QAnd any reason for saying that it was high risk?
AI think it was perhaps the, you know, the type of properties and standard of properties that were there at that time in our view.
...
QWithin the industry are the factors that you have articulated this morning the relevant factors that are used by the industry in assessing the risk of premises to be insured for fire?
AYes they are.
QThey're common through the industry?
AYes they would be fairly accepted standards. I mean there might be additional information that obviously people in different companies would require from time to time but certainly those ones would be standard."
In cross–examination he was taken to the 60 day non–occupancy clause and accepted that that was the period he would use as the yardstick to decide when a person should tell the company that the property was going to be vacant. The following exchanges took place in cross–examination:
"QAre you saying that if someone has work done during the 59 days they're away then they have to tell the insurance company?
AWell (I'm not) necessarily saying that to be the case, No
QSo that they could quite easily decide to have their house redecorated inside and if it only took 59 days it wouldn't be a problem as far as the insurer was concerned?
AProbably not.
QAs I understand it, you've said that in the circumstances that you discovered that the property was being painted and was empty for that purpose, you would cancel. You didn't even limit it to 60 days, you just seemed to suggest this morning that if you were satisfied that the property was vacant for any period of time you would cancel. Do you still say that?
AWell, if it was looking for renovations I mean we're talking about – this morning we were talking more than just painting, you know, it's very difficult to dissect into painting and etc. for having renovations done generally, well then we could well have done. It's a question of degree.
...
QIf the work that the insured was contemplating was limited to repainting inside, which involved obviously cleaning and sanding the walls prior to repainting, and doing some minor maintenance work like fixing latches on doors or minor things of that nature, that work isn't something which you would regard as increasing the risk, that work in itself, would you?
AProbably not something that we would see as a great increase, No
QWell I want to suggest to you it's no increase, is it?
ANo, perhaps it isn't.
QWell it's not perhaps.
APerhaps it isn't.
...
QIn this particular case if the work that was being done to the property was limited to repainting the property inside and some minor maintenance, things like fixing latches on doors or cupboards inside and the property was left vacant while that work was being carried out for a period less than 60 days, there wouldn't be any increase to the risk so far as you were concerned, would there?
ANo, probably not.
...
QI want to suggest to you the fact that one part of the premises does not have someone living in them would also not increase the risk as far as you were concerned?
AI don't accept that.
QIt's a question of whether there's anyone in the whole of the premises isn't it?
AWell, there's two flats, I think you mentioned earlier, so it's a question of whether they're both occupied in terms of underwriting.
QI want to suggest to you that there was no solid brick wall between both flats, that would you have really is an old house which has two flats in it and in fact the bedroom of one flat sits above the second flat. Would you agree in those circumstances that whether one flat is occupied or not it's not really going to matter as long the other one is?
AI think the fact that one is unoccupied is still very relevant.
...
QI would suggest to you that the risk of burglary is adequately covered for this property if there is one person occupying one part of the property. That's so isn't it?
AI think the risk generally if you've got a flat which is unoccupied well then, I think it's a greater risk to damage than obviously a premises that aren't occupied.
QBut if the room next door is occupied it's all within the one structure. The risk isn't there is it?
AI think it is, I mean they're two flats.
QSo you just make the distinction really because there are two flats and that's the only distinction you can make?
AYes, well they're two flats, yes.
QI want to suggest to you that whilst there was one person within this building that the risk as far as burglary, vandalism, fire was not significantly increased?
ANo I disagree, in this case one flat was unoccupied and that certainly increases the risk.
QAnd that's regardless of the layout of the flats inside the building?
AWell there's two flats, so there's two flats.
QSo you say that would be, regardless of how intertwined, if you like, the two flats are?
AWell, if they're two flats, then I guess they're two flats.
QAre you saying that regardless of the relative sizes of the two flats within the one building and regardless of how intertwined they might be within the two premises, then just regardless of all those factors, you still say that you should know one wasn't occupied?
AYes, if there's two flats there and one is unoccupied then yes, they should advise us.
QSo even within a large building where there might be several flats, you've got one small flat consisting of a bed sitting room with a small bathroom toilet facility to it, very small in proportion to the whole lot, if that's empty you would say that that's a material factor that the insurer should have notice of and that if you didn't have notice of it, there's every chance that you'd cancel the policy?
AYes we should be advised of it.
...
QYou've given evidence about the locality and that being a factor for you, for the company, in accepting risk and your evidence was that North Hobart in 1983 was a higher risk area. Do you stand by that?
AYes, I think that is a reasonable statement that applied, you know, at that time.
QDid you prepare any research or conduct any investigations in that?
AI think it was just a view that, you know, we held in view of, I guess, the standards of properties perhaps in that area were not as good as, you know, in some of the other area.
QWhy do you say it's a higher risk though in that area?
AWell I think ..
QIt's fairly closely populated isn't it?
AIt's fairly close yes, it's certainly close to town.
QThere'd be neighbours around who'd see or could see intruders, detect early signs of fire if there was a fire, accidental or deliberate?
AI think there was a, in view of the values of the property there, there was a different, I guess, attracted perhaps a different type of people to that area.
QWell, I'm really having difficulty in understanding what you mean by suggesting that there was some higher risk factor because of the locality, I just want to give you the opportunity of explaining that to me if you would?
AWell, properties are cheaper there so obviously, you know, people lower down the scale could afford them and perhaps, you know, that can tend to attract a higher risk from the insurance point of view. That was our assessment I mean.
QWell, did you have a greater number of claims in that area?
AWell I think in the lower valued areas it tends to be that way, yes, as a general statement.
QHave you done any research on that?
AOnly from my experience, you know, in insurance, it tends to be the trend than with some area around Hobart even today.
QIsn't another view that areas of higher value attract more burglaries, there's more to steal?
AWell, that can occur, in some of the higher values of course some people tend to – if they have a lot of contents, then they take more precautions.
QAnd you get more burglaries?
AWell you can do."
In my view it has not been demonstrated that the fact the considerably smaller flat had been untenanted since the previous September when considered in the light of the presence in the second flat of several tenants, one of whom occupied a bedroom immediately above the empty flat, was a fact which would have reasonably affected the mind of a prudent insurer in determining whether to accept the risk, and if so, on what terms. The defendant's witness did not advance any reason why that should be so. Obviously if the whole of the insured premises were left vacant for a significant period of time, that would increase the risk of damage being done to it by trespassers, but the period considered significant by the insurer was one of 60 days and it stipulated that the policy would be suspended if the premises (i.e. by the definition in the policy, the whole premises) were left without a permanent occupant. The witness conceded that had the building been a single dwelling with some parts totally vacant and unused by the owner or occupier, that would not be material to the risk, but sought to make the distinction irrespective of the relative sizes or situations of the used and unused parts, that if the property consisted of any number of flats, the fact that one, no matter how small, was vacant, is a fact that the insurer would need to know. I can see no logical basis for such a bald assertion and in the circumstances of this case, no good reason has been demonstrated why the fact that No 342 was vacant for the length of time it had been prior to the proposal, was relevant to the risk or material as defined by Samuels J. Nor can I see any logical basis for the assertion that the fact that the insured intended imminently to have the remaining one vacated and both flats redecorated and adequately maintained in a works programme which would not have involved the property being vacant for more than 60 days, was material. I have already cited Mr Young's evidence that work of the kind I find was contemplated and carried out, would not increase the risk if it were carried out in, and the property left vacant for, no more than a period of 60 days.
The plaintiff warranted that it would advise of any changes materially varying any of the facts and circumstances existing at the date of the proposal. It was submitted that the vacating of the second flat, thereby rendering the whole premises vacant, was a material change. In my opinion, it was not. It brought into existence a state of affairs contemplated and covered by the 60 day clause in the policy, there was no necessity to advise the insurer of it. In my opinion, the defendant has no basis for avoiding liability for the fire and for compensating the plaintiff in respect of it.
The plaintiff called a valuer, Mr Brothers, who gave evidence that the value of the real property was reduced by the fire by $17,000.00. The evidence was not challenged, no other evidence of value was called by the defendant, and I am satisfied that so far as the realty is concerned, the defendant, in the absence of an election by it to reinstate, ought to have paid that sum to the plaintiff by about the end of 1984. Had it done so it would have discharged its obligations under the policy. It wrongly repudiated its liability thereunder and was thus in breach of contract. There has been considerable debate from the Bar table as to whether the measure of damages should be confined to the amount payable under the policy (together with such interest as, pursuant to s35(1)(b) of the Supreme Court Civil Procedure Act 1932, I have a discretion to allow) or whether the plaintiff is entitled to recover all consequential losses within the reasonable contemplation of the parties at the time the contract was entered into in accordance with the principles set out in Hadley v Baxendale (1854) 9 Ex 341 and Hungerfords v Walker (1989) 84 ALR 119. If the latter, it is submitted that the plaintiff, having been deprived of the necessary funds to restore and to retain the property as an investment property, but having been forced to sell it, is entitled to be compensated on the basis of its present capital value assessed on the hypothesis that it had been restored to its pre–accident condition by the expenditure of the funds wrongly withheld by the defendant, indexed allowance being made for the receipt of the proceeds of sale, together with the net loss of rental which would have been received and any additional income tax thereon occasioned by its having been received in a single year rather than having been spread out over a number of years when it would otherwise have attracted less tax or even no tax at all.
I am in no doubt that the defendant wrongfully repudiated the contract and that the plaintiff could have elected to treat the contract as at an end and sue for damages assessable on the latter principle or to affirm the contract and sue to recover the amount payable thereunder. Counsel for the defendant submits that the plaintiff took the second course and is entitled only to the reduced value plus interest, whereas counsel for the plaintiff submits that it did accept the repudiation and sued for damages at large. The Statement of Claim pleads the plaintiff's ownership of the premises, the issue of the policy agreeing to indemnify against damage by fire, the plaintiff's insurable interest in the premises, their damage by fire within the period of the policy, the suffering of loss and damage by the plaintiff thereby, the neglect or refusal of the defendant to indemnify and the suffering of loss and damage by the plaintiff thereby, particulars whereof were to be supplied before trial. The plaintiff claimed "damages to be assessed". In Taylor v J Thomas & Son (1983) 2 ANZ Insurance Cases 77,991, McPherson J, delivering a judgment of the Full Court of the Supreme Court of Queensland, in which Kelly and GN Williams JJ concurred, said at p77, 997:
"... where a party relies only on his pleading to demonstrate his election to accept the repudiation, it is his duty to make it clear by appropriate pleading in accordance with the rules of court that such an election has been made, and that the claim under the policy is to be pursued only as an alternative to the allegation of repudiation in the event that the latter is unsuccessful. The reason for this is that the election to accept the repudiation terminates the contract and so affects the rights of the parties, and if a party intends for the first time to make that election by his pleading, then he should do so unambiguously."
The plaintiff, on 24 June 1985, gave particulars of its damages and loss "suffered as a result of the defendant's refusal to indemnify the plaintiff pursuant to the terms of the contract of insurance" in the following form:
"1The plaintiff's property was damaged to such an extent that the difference in pre–fire and post–fire market valuation of the property made it a more economic proposition, in light of the Defendant's ultimate rejection of the claim first notified on the 22nd day of February, 1984, to finally sell the property rather than repair it.
2The plaintiff's claim for damages is therefore :–
(a)Pre–fire market value $42,000.00
Less post fire market value 25,000.00
Loss of value due to fire 17,000.00
(b)Loss of rental
The Plaintiff's claim for loss of rental is for the period from the date of the fire until six months after the date of notification of rejection of the claim by the Defendant (value of rental to be assessed).
(c)The Plaintiff further claims the loss of rental from the beforementioned date until the date of completion of the sale of the property (7th June, 1985) or alternatively the Plaintiff claims interest payable to the Mortgagees of the property from the 22nd day of August, 1984 until the date of completion of the sale of the property (7th June, 1985) and interest at Bank overdraft rate on the sum of $17,000.00 from the 22nd day of August, 1984 until the 7th June, 1985.
3It being within the contemplation of the parties that the Plaintiff's property was an investment property the Plaintiff will claim interest on the sum of $17,000.00 at Bank overdraft rate until Judgment or settlement.
4Alternatively, the Plaintiff will claim interest at the rate of 10% on the sum of $17,000.00 until the date of Judgment or settlement."
The plaintiff appears to be relying on the repudiation and seeking damages therefor but the damages sought are not those sought in argument at the trial and supported by the evidence called by the plaintiff and received under objection from the defendant. In these circumstances it seems to me to be inappropriate to consider awarding damages other than those particularised. In any event, so far as the claim for an assessment based on the present notional capital value is concerned, I am not prepared to find that the plaintiff disclosed to the defendant the fact that it intended to retain the property as a long term investment and that such a loss was within their reasonable contemplation. It is, in my view, entirely speculative as to how long the plaintiff might have retained the property and received income and attracted a tax liability. Its fortunes fluctuated and had an attractive offer been made for the premises, it might well have been accepted. In July 1983 the Capital Gains Tax disincentive to dispose of such a property was not a consideration. From the defendant's point of view it had no reason to suppose, at the time of the proposal, that a breach of the contract by it could well bring about such a capital loss. What could have been reasonably foreseen was that if a sum equal to the reduced value of the property was wrongfully withheld by it, the insured would be deprived of the benefit at least of investing it at something approaching bank rates of interest or might be forced to borrow funds to repair the property at such rates. An allowance to the plaintiff of such interest under s35(1)(b) of the Supreme Court Civil Procedure Act, would produce the same result and seems to me to be the appropriate remedy. As Mason CJ and Wilson J said in their joint judgment in Hungerfords v Walker (supra) at p133:
"Simple interest would not reflect accurately the extent of the respondent's loss. Simple interest almost always under–compensates the injured party's true loss."
The same is true in this case and I think on either basis it is just to award interest on the loss of $17,000.00 compounded with quarterly rests at the net interests rates proved at the trial to be available to mortgagees. Taking 1 January 1984 as the date by which the money ought to have been paid, I calculate the amount of the loss at $54,439.00 using the following table:
Principal Percentage Period Date To Interest Accrued
17,000 14.2 45 days 15/2/84 298
17,298 13.5 1 quarter 15/5/84 583
17,881 13.5 1 quarter 15/8/84 603
18,484 14.25 1 quarter 15/11/84 658
19,142 13.75 1 quarter 15/2/85 658
19,800 13.75 1 quarter 15/5/85 681
20,481 14.25 1 quarter 15/8/85 730
21,211 14.25 1 quarter 15/11/85 756
21,967 16.25 1 quarter 15/2/86 906
22,873 16.25 1 quarter 15/5/86 929
23,802 15.25 1 quarter 15/8/86 907
24,709 15.25 1 quarter 15/11/86 942
25,849 16 1 quarter 15/2/87 1034
26,883 16 1 quarter 15/5/87 1075
27,958 16 1 quarter 15/8/87 1118
29,076 15.25 1 quarter 15/11/87 1108
30,185 14.25 1 quarter 15/2/88 1075
31,260 14.24 1 quarter 15/5/88 1114
32,374 13.25 1 quarter 15/5/88 1072
33,446 13.75 1 quarter 15/11/88 1129
34,596 14.25 1 quarter 15/2/89 1150
35,746 15.25 1 quarter 15/5/89 1362
37,109 17 1 quarter 15/8/89 1577
38,686 17.5 1 quarter 15/11/89 1692
40,378 17.5 1 quarter 15/2/90 1767
42,144 17.5 1 quarter 15/5/90 1844
43,988 16.75 1 quarter 15/8/90 1842
45,830 16.25 1 quarter 15/11/90 1890
47,720 15 1 quarter 15/2/91 1789
49,509 14 1 quarter 15/5/91 1733
51,242 14 1 quarter 15/8/91 179353,035 14 69 days 2310/91 1404
Professor Sutton, in his work, Insurance Law in Australia, 2nd edn at p835N, says:
"A distinction is to be draw between the discretionary inclusion of interest in a judgment sum and the award of damages by way of interest for the loss of the use of money of which the plaintiff has been deprived through the defendant's breach of contract. Compound interest was awarded under the latter head in Trans–Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1990) 6 ANZ Insurance Cases 60949."
In that case Giles J of the Supreme Court of New South Wales rejected a submission which in his view confused:
"The discretionary inclusion of interest in a judgment sum pursuant to s94 of the Supreme Court Act 1970 (NSW) with the award of damages for the loss of use of money. It is the latter [he said] which may result in the award of compound interest." (At p76275).
No doubt that is correct having regard to the legislation in that jurisdiction but s94 is to be contrasted with our own s35 which permits the awarding of damages in the nature of interest. The observations of the Court of Appeal in Simonius Vischer v Holt & Thompson (1979) 2 NSWLR 322, on which Giles J relied, likewise have little relevance to an award under the latter section. The frequency of rests in the calculation is another matter of concern. The evidence of mortgage rates available through solicitors suggested a quarterly setting of rates and justifies the inference that a client investor could expect quarterly payments of interest. It is for that reason that I have used quarterly rests. In the Trans–Pacific case on the other hand, Giles J had evidence of the plaintiff's practice of investing in the short term money market and of calculations based on monthly rests.
It was also submitted by counsel for the defendant that it was unreasonable to allow interest over a long period as the plaintiff had delayed bringing the matter before the Court. Why, when the writ had been issued in October 1984 the case was not brought to trial until 10 September 1991, was not clarified by the evidence. It was suggested to Mr Russell Young in cross–examination that the delay was the fault of the plaintiff. He agreed that the writ was not issued until 13 months after the fire, and that some interlocutory proceedings were unsuccessfully opposed by the plaintiff. He contended that the delay was caused by obstruction on the part of the defendant's solicitors but this was not substantiated. I am unable to say whose fault it was, if, indeed, it was the fault of anyone. Since delivery of the particulars in June 1985, a claim for interest has been clearly made. I do not think that justice requires the making of any significant discount in the interest component having regard to the delay in issuing the writ after the defendant's repudiation of liability on 29 February 1984 and any delays occasioned by contests in the interlocutory phase. The defendant repudiated liability and declined to pay anything. It has chosen a course which has kept the plaintiff out of at least the reduced value of the house since early 1984. Now that its repudiation has been held to be wrong, I can see no justification for not allowing as damages in the nature of interest a sum equal to the interest lost by the plaintiff since the date of that repudiation.
The only other amount in the particulars to be considered is the claim for loss of rent. In my view a period of some three months should be allowed to the defendant before settlement of the claim and as rent during that time was not the subject of insurance cover, it is not recoverable. As I have allowed interest compounded with quarterly rests from 1 January 1984, I consider that that adequately compensates the plaintiff. Had it received the monies due to it by that date, there would still have been considerable time before the property could have been made ready for tenants and the plaintiff's record for procrastination, as exemplified by its delay in commencing the modest programme in August 1983 and in its disposal of the shell of the building in February 1985, suggests that rental would not be likely to have been received for many months after 1 January 1984. During that time, even had the insurance money been received, the interest due under the mortgage would still have accrued and I can see no basis for, in effect, ordering recovery of it from the insurer.
The plaintiff also claims the value of the insured contents of the premises. There was little evidence about them beyond the fact that there were carpets, blinds, some light fittings, refrigerators and stoves. There was no evidence that the refrigerators and stoves were in fact damaged by the fire. I would accept that the carpets were ruined by fire, water or the elements, but there was no evidence of their condition, dimensions or value. The amount attributed to the contents when the transfer was stamped is of little guidance. It is only at best an estimate by the purchasers of their true value and often only a guess at what the assessor is likely to accept without further query at the time of the purchase which in this case was two years before the fire. No doubt they were worth something but the evidence does not enable me to say how much and in the circumstances I cannot allow anything for the contents.
There will be judgment for the plaintiff against the defendant for $54,439.00.
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