Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd

[1996] HCATrans 332

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P51 of 1996

B e t w e e n -

UNITY INSURANCE BROKERS PTY LTD

Applicant

and

ROCCO PEZZANO PTY LTD

Respondent

Application for special leave to appeal

DAWSON J
McHUGH J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON MONDAY, 4 NOVEMBER 1996, AT 3.00 PM

Copyright in the High Court of Australia

MR C.J.L. PULLIN, QC:   May it please the Court, with MR M.P. CORNES, I appear for the applicant.  (instructed by Barker Gosling)

MR D.A. DAWES:   May it please the Court, I appear for the respondent.  (instructed by Michael Rennie)

DAWSON J:   Yes.

MR PULLIN:   Yours Honours, just before I deal with the special leave point which, in summary, is a point which arrives because of no evidence and, therefore, raises a question of law, I would like to briefly state the facts because the facts commonly arise, as we found from a search of the litigation over the last few years, and it will only take me a couple of minutes to deal with them. 

In 1992 the respondent, Mr Pezzano, arranged insurance against fire damage via my client broker, and the insurance policy was with NZI Insurance.  Mr Pezzano had a history of 12 claims between 1979 and 1992.  The proposal revealed only one of those claims.  The broker owed a duty of care under the general law and in contract to exercise reasonable care in arranging the insurance and the broker was admittedly negligent, and therefore breached the duty of care in not disclosing the other 11 claims.  A fire occurred, damaging the insured property; NZI denied liability on several grounds ‑ ‑ ‑

DAWSON J:   We are familiar with the facts, Mr Pullin.

MR PULLIN:   Very well, your Honour.  The critical point that emerged during the trial and on appeal was that Mr Pezzano led no evidence from any person from NZI about NZI’s system, about its underwriting policies, or about what it would have done had it been disclosed to it at the time the policy was written that there were 11 other claims. 

KIRBY J:   The result of the decision under application is, if it is upheld, that, in cases of this kind you would have to call that evidence.  Now, is there any particular difficulty in doing that.  Is there anything that I am missing about the ‑ you are at arm’s length with NZI at that stage, and you have disposed of that aspect  of it. What was the problem with calling somebody from NZI to say what they would have done?

MR PULLIN:   It can arise in many cases, your Honour.  Both parties are reluctant to approach the insurer.  The insured in this case had an insured who was arguing that it had been guilty of arson and was denying its liability and so therefore not very willing to help.  On our side, we were not contributing to the settlement negotiations by making an offer.  So, both parties are confronted with an insurance company not very willing to help.

It is a heresy to suggest that it is us who must go along and call that evidence.  It is the plaintiff who must lead the evidence to satisfy the Court about the fact that the insurance company was entitled to deny its liability, and not unreasonably deny its liability.

Section 28 of the Insurance Contracts Act has made a revolutionary change to the common law.  If I can just indicate, reading from Sutton that it has been expressed in many cases now, at paragraph 3.01 in the list of authorities:

But in the absence of fraud the insurer has no right to avoid the contract, and this is a major departure from the common law which permitted the contract to be avoided for innocent material misrepresentation.

Then one other sentence:

Where the non‑disclosure or misrepresentation is innocent, the insurer cannot avoid the contract, and his sole remedy is to reduce his liability in respect of any claim that has been made in accordance with the subsection.

It has been made clear in a number of cases ‑ ‑ ‑

DAWSON J:   The insurance company could have escaped liability if it could show that it would not have entered into the insurance contract had there been a full disclosure, yes.  So, there is an area of uncertainty.  It may or may not have succeeded in that proposition.  On the other hand, if it did succeed then Mr Pezzano would have lost.  Why was not a settlement reasonable in those circumstances?

MR PULLIN:   It is not a question of the reasonableness, your Honour, you really need to look ‑ ‑ ‑

DAWSON J:   That is not contested is it, that the settlement was a reasonable settlement in the circumstances, that is not contested?

MR PULLIN: Most certainly it was. It certainly was contested. We say that it was an unreasonable denial of liability because the insurer, under section 28 of the Insurance Contracts Act ,could not deny liability.

DAWSON J:   No, you mistake my question.  Is it now said that the settlement was an unwise and imprudent settlement?

MR PULLIN:   Your Honour, it really begs the question because the question is whether or not the insurance company could reduce its liability in this case effectively to nil which is what it was pleading ‑ ‑ ‑

DAWSON J:   Most settlements beg questions, but I am asking you do you say that it was an imprudent settlement?

MR PULLIN:   We say it does not matter, your Honour.  We say that if the insurance ‑ ‑ ‑

DAWSON J:   Maybe you do, but maybe others think it does matter.  Do you say it was an imprudent settlement?

MR PULLIN:   We say that it was, from the insurance company’s point of view, a good settlement because we say it would not have been able to reduce its liability to nil unless it could lead some evidence to satisfy the court, and if the insured takes on the broker having settled - let us assume it settled for $100,000 or $2 - if there is no evidence then led by the insured in the proceedings before the trial judge against the broker, how does one know, just as in a case involving say ‑ ‑ ‑

DAWSON J:   Well, for a variety of ways.  I presume that the settlement was made on advice.  Was it?

MR PULLIN:   Yes, but, your Honour, it does not, with respect, matter about the insured.  Can I just explain why.  The insured comes to court and says, “Look, because of the misrepresentation, I realise that the policy is good.  I must convince the court that the insurer was entitled to reduce its liability to nil.”  That is not judged in objective terms.  That is judged by assessing whether or not the insurance company was able to reduce its liability by establishing by some evidence that if it had had full disclosure made to it then in those circumstances it would not have written the policy.  Now, how can the court assess that without hearing any evidence at all?

DAWSON J:   It does not have to.  All it has to see is that the settlement was a reasonable settlement.  After all, Mr Pezzano was faced with a situation in which he might have lost everything and he had to assess the risk which he was taking in going ahead, that is, the risk of the insurance company proving that it would not have entered into the contract.  Now, if he assessed that risk honestly and reasonably and entered into a settlement on the basis of that assessment it does not matter whether the evidence is called subsequently.  The settlement is a reasonable settlement.  What is wrong with that?

MR PULLIN:   I am sorry, your Honour, I am obviously not making myself clear.  Let me give an analogous situation.  Let us look at the situation of somebody suing‑ ‑ ‑

DAWSON J:   You want to give the court another opportunity to reassess the reasonableness of the settlement.  That is an event which has occurred.

MR PULLIN:   No, I am sorry, your Honour, we are not‑ ‑ ‑

McHUGH J:   That is not your point.  Your point is that the plaintiff did not prove any loss.  That is your point, is it?

MR PULLIN:   That is correct, your Honour, yes.

KIRBY J:   And that the onus is on the plaintiff to do so; that this is a matter which is for the application of the Act quite a common problem in practice and, as I understand it, you say that there are competing authorities within the country and that now the Full Court’s decision will, in accordance with Gold Mines, be followed unless this Court intervenes?

MR PULLIN:   That is right, your Honour.  Indeed, there have been five - I think, five cases in 1994 and 1995 where exactly this fact situation has arisen.  Now, think of the cases it must have settled and now think of the situation with advisers who are acting for a plaintiff in these circumstances.  They say, “Look, we will settle with the insurer.  We’re worried about having to prove what the insurer would or would not have done in the hypothetical situation if disclosure had been made, but on the authority of Unity and Pezzano we now need not worry about leading that evidence.  We will simply say that our settlement was a reasonable one.”  Something which you simply cannot judge.  How can it be said that the settlement was reasonable.  Why should it not have been 800,000‑ ‑ ‑

DAWSON J:   Well, it is something that litigants have to judge every day of the week.  Or working days, anyway.

KIRBY J:   Why do you say that the proposition you put to this Court is the better operation of the Insurance Contracts Act - the correct application of the Act?

MR PULLIN:   Well, can I just, from the case of Advance v Matthews, which eventually ended up in the High Court - Justice McHugh was involved in that at the appellate court level - but in relation to that, let me just read - it is not on our list of authorities, although it is referred to in the authorities - what was said by Mr Justice Young about what the insurer had to do to succeed in his defence, given that the common law has changed, he is no longer allowed to avoid the policy, he must lead some evidence, and this is what was said at page 75,000 in the ANZ Insurances Cases report, (1987) 4 ANZ Insurance Cases, 60-813:

The onus is on the insurer to show that it would have been in a different position if the failure of the insured to comply with the statutory duty had not occurred.  This can only be done by overcoming a rather awkward evidentiary barrier of proving what must have happened had a hypothetical set of circumstances been in existence -

ie. a full disclosure had been made.  And then continuing on:

It is difficult to overcome this barrier, it is almost impossible if the organisation itself shows that either it has no guidelines or alternatively that it has guidelines but there is insufficient discipline in the organisation to adhere to them.  What little evidence there is in this case suggests that there is insufficient adherence to the guidelines for me to come to a conclusion that the policy would not have been written had full disclosure been made.

The only relevance of the settlement in this case is that it reduces our liability.  The reasonableness of it does not matter.  In other words, if the insurer was entitled to reduce its liability to nil, then we have done a good deal for ourselves in watching them settle at 900,000 or 800,000 or 600,000.  There is no way of judging the reasonableness of that settlement without knowing what the insurer was entitled to do.

McHUGH J:   But your point must be, must it not, that the onus was on the plaintiff to prove loss.  If there had been no settlement, the plaintiff would have had to call somebody from NZI to prove what its policy would have been, and the settlement is res inter alios acta as far as you are concerned.  Proves nothing in the case between you and the plaintiff.

MR PULLIN:   Absolutely.  And if I can mention the analogy I was going to mention, let us go to the cases where somebody says, “The defendant, my solicitor, did not issue a writ within time.”  He does not come along and simply assert he had a cause of action, he has got to lead some evidence to satisfy the Court that there was a cause of action which he had lost.  And then you go into the Mylek‑type assessment of what the value of that loss is.  But you do not just come along and say, “Here is the writ.  I should have issued this writ within time,” and then not lead any ‑ ‑ ‑

McHUGH J:   I must say, at the moment I have some difficulty in understanding what loss of chance, or opportunity, or benefit has really got to do with this case.  Although Justice Ipp seemed to see it as the critical point, it does not seem to me to be relevant, at the moment anyway.

MR PULLIN:   I agree entirely, your Honour.  What is clear, and it is represented in the judgments, is that the Sellars point, that is, you must prove you suffered some loss on the balance of probabilities, that is clear.  It is actually voiced in the judgments.

DAWSON J:   There is no doubt he suffered loss, is there?

MR PULLIN:   Well, how do we know, because, this is the difference. Under section 28 of the Insurance Contracts Act there is a policy which is good, and it is only not good if the insurer can prove that he was entitled to reduce his liability to nil.

DAWSON J:   But that is a question whether you caused the loss.  I mean, he did suffer loss, there is no doubt about that.

MR PULLIN:   No, he did not.  There is no evidence at all that the insurer was entitled to reduce ‑ ‑ ‑

DAWSON J:   By entering into a settlement for less than the full amount, he suffered loss in the sense as a result of what he alleges was your negligence, namely that he did not have a full cover.

McHUGH J:   But that is your point, is it not?  In so far as he suffered loss, it may well be because of his own act.

DAWSON J:   That is the point, but the other side to that point is, of course, that you can foresee, as a result of your negligence, that there will be litigation and you can foresee, as an ordinary incident of litigation, there may be a reasonable settlement, and it is just part of the course of events which one can see.

MR PULLIN:   Well, it is overlooking, your Honour, the fact that section 28 of the Insurance Contracts Act has brought a tremendous change; the policy is good and remains good, and we do not ‑ ‑ ‑

DAWSON J:   No doubt, but there is no question that claims to which that section is applicable may be settled.

MR PULLIN:   Yes, but we do not know whether the settlement was a reasonable one or not, and it does not matter, your Honour ‑ ‑ ‑

DAWSON J:   You may never know, that is true, but what you could foresee as a broker was that if you did not effect a full cover there may be litigation between Mr Pezzano, in this case, and the insurance company, and that litigation may be reasonably settled in the ordinary course of events.  That is the case against you.

MR PULLIN:   Yes, but it does not matter what the amount of the settlement is.  That simply reduces the amount of our liability because, in this case, it was being argued that the insurer was entitled to reduce its liability to nil.  There was no evidence to support that ‑ ‑ ‑

DAWSON J:   Well you have made that point, yes.

KIRBY J:   May I ask you, on another point?  It is contended against you that this is not a suitable vehicle because of the fact that the trial was conducted on an implicit assumption that the settlement was reasonable, and references are given to that.  Now, what do you say, in response to that, because that is the only matter that is troubling me at the moment?

MR PULLIN:   Yes.  Well, I have answered that, your Honour, in my outline of submissions.  It is not in fact raised against us in the other side’s outline.  Mr Justice Ipp made an assertion that it was conducted on an implicit assumption.  We dispute that statement but, putting that aside, the fact is that the trial, the notice of appeal and the appeal were all argued on the basis that this was our central point.  The trial judge noted that it was the foremost contention of the defendant that:

no evidence was lead from NZI -

That is covered in paragraph 23 of our outline of submissions on page 8. 

The first and second grounds of appeal complained about there being no evidence led about what the insurer’s would do, and the Full Court fully

dealt with the issue, made this statement that I do not understand on the side, but if you look at, for example, page 87 of the application book, his Honour Mr Justice Ipp, quoting from the trial judge.  If you look at the passage in the middle of the page quoted from the trial judge, the last sentence is the trial judge’s conclusion:

I do not consider that, the [respondent] was obliged, in this action, to lead evidence from NZI to the effect that its assumption was correct.

And then his Honour dealt with that point.  If your Honours go back to page 66 in particular, you will see our contention clearly recorded at the top on the page, the first sentence on the page:

The appellant, however, contended that NZI would not have been entitled to reduce its liability under the policy, or, alternatively, there was no -

and let us forget “insufficient” for the purpose of this application -

evidence that NZI would have been entitled to so reduce its liability.

So, although his Honour made the comment, I do not know why he made the comment.  It was most clearly the central point in our case from start to finish and still is today.  They are my submissions, may it please the Court.

DAWSON J:   thank you, Mr Pullin.  Yes, Mr Dawes.

MR DAWES:   May it please your Honours.  It is my submission that the central fallacy in the argument your Honours have just heard is that at the trial against the broker, it is incumbent on the plaintiff, if I may call it that, to run the original trial.  That is an argument that has been put in many of these cases and it has always been rejected.  That argument was put in Kitchen’s Case and was rejected by Lord Evershed.  It was run in the South Australian case of Tutunkoff v Thiele, which is not on my list of authorities, but your Honours will find it cited in Johnson v Perez at 364.

The point is that the trial court in the present case was not trying the case against the original insurer, and so cases like Advance v Matthews do not really come into the picture.  There was no onus on NZI to prove anything in our case against the broker.  What we had to prove was that the broker’s conduct left us with a detriment, that we were likely to lose against the insurer, and that is what we proved.  Now, to be sure, we did not call the insurer but we called a lot of other evidence, and the other side elected not to join issue on that evidence.  It did not call NZI or anybody else much.  At the end of the day we got up on that evidence.

The courts have said many times that in this type of action against a broker what you are looking at is not the original trial.  You do not try the original trial.  You are looking at the prospects of victory or defeat on the evidence before the court.  That is what happened in this case.

McHUGH J:   But you had to prove a breach of duty, which you did, and you had to prove that that breach of duty caused you loss.  The position since the Insurance Contracts Act is very different.  You had a policy and the onus was on you to show that that policy was worthless.

MR DAWES:   Yes.

McHUGH J:   Well, you failed to do so.

MR DAWES:   Your Honour, we had to prove some loss.  We proved some loss by simply showing that we had to face the non‑disclosure defence.

McHUGH J:   This case was never conducted as a loss of opportunity case.  You would be entitled to a fraction of the damages you got if it had been conducted on that basis.

MR DAWES:   Your Honour, I think it was, with respect, because I think it was common cause that there was no reason why we should have got up on the full claim absent this non‑disclosure defence.  That was all there was to it.  It was not a case where there was a very dodgy situation where the court had to consider, say, whether it was 10 or 50 per cent.  It was 100 per cent or nothing.  That is how both sides approached the matter and your Honours will see that ‑ ‑ ‑

McHUGH J:   But that indicates it was not a loss of opportunity case.

MR DAWES:   It was loss of an opportunity to get 100 per cent.

McHUGH J:   It does not sound to me like a loss of opportunity case, loss of 100 per cent.

MR DAWES:   I have given your Honours ‑ ‑ ‑

DAWSON J:   Really what it amounted to was that you were in a situation where it was being said against you that you had no cover.  If that was correct, that was caused by the negligence of the broker.

MR DAWES:   Yes.

DAWSON J:   And that was your loss, everything.  But there was some question as to what the insurance company would have done so that you were able to settle at less than the full amount.  You say it was reasonable to settle at that amount.

MR DAWES:   Yes, I respectfully ‑ ‑ ‑

McHUGH J:   This was not an injurious falsehood case.  Your loss was not a false statement that you had no cover.  You had to prove that you had no cover.

MR DAWES:   Your Honour, we did.  We proved that NZI repudiated the claim and raised a defence.  What is more, we had ‑ ‑ ‑

McHUGH J:   That proves nothing.  That is res inter alios acta.  What NZI does to you is no evidence against this particular, it is hearsay.

MR DAWES:   Your Honour, if I may respectfully say so, all these cases are res inter alios acta.  Kitchen v RAF Association was res inter alios acta, so was Biggin v Permanite.  Wherever you have a third party and a claim which has not been put to the full test, we have not run our action against the third party to finality because we settled; we thought it prudent to settle.  The courts say that in this situation the court favours reasonable settlements.  The court would be very foolish to force litigants to go the distance before they could get up on a claim against a broker.

KIRBY J:   That might be right, and you might ultimately succeed in persuading the Court to that point, but surely this is, looking at it from the point of view of the administration of the special leave jurisdiction, a matter of significance in the administration of the Act.  Unless the Full Court is clearly right, the matter is one which is now going to probably govern the advice that are given right throughout the country because this is a Full Court decision.

MR DAWES:   Yes.

KIRBY J:    And this is a common problem, that brokers do not reveal facts that their clients say they ought to have and then you have this problem of settlement, and how you deal with it.  So, it is a significant issue. 

MR DAWES:   Well, your Honour, it is my respectful submission that the case law is fairly settled.  One has cases like Tadoran and, well, Kitchen, of course, is the one we always go to.

KIRBY J:   If it is a simple issue, it will not take us long.

MR DAWES:   Yes.  Well, I am hoping it is so simple it will not take your Honours long today.

McHUGH J:   The other point is that the English cases are not concerned with a section such as our section.

KIRBY J: Section 28 works a revolution, so we are told.

MR DAWES:   That may be so, but in every case there is a possibility that the third party might or might not have prevailed, and it is simply a question of the Court assessing, on the evidence before it, what the prospects were against that third party. Now, that situation is not altered by the fact that there is a section 28 in force. The court has still got to judge, given that the trial against NZI did not go the distance, what were the plaintiff’s prospects if it had gone the distance? And the court looked at the evidence and decided, “Well, the evidence is adequate to prove what the plaintiff wants”. It is a case of, really, adequacy of evidence, in my submission. I hope I am not telling tales, but I think my learned friend conceded a similar question to the Full Court. It was a question of adequacy of evidence. Really, that is all I can say about it.

DAWSON J:   Yes.  Thank you, Mr Dawes. 

The Court need not trouble you, Mr Pullin.  There will be a grant of special leave in this case.

AT 3.26 PM THE MATTER WAS CONCLUDED