State Insurance Ltd v Brightwell HC Hamilton AP 29/01

[2001] NZHC 754

IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY AP 29/01

BETWEEN: STATE INSURANCE LTD
Appellant

AND: GLEN EDWARD BRIGHTWELL and CHRISTINE JOY BRIGHTWELL Respondents

Hearing: 16 July 2001

Counsel: Mr GJ Turner & Mr SN Soysa for Appellant
Mr D O’Neill for Respondent

Judgment: 16 August 2001

JUDGMENT OF HAMMOND J

Solicitors: Fortune Manning, Auckland for Appellant
D Nielsen, Hamilton for Respondent

INTRODUCTION

[1] This is an appeal by an insurer who sought (unsuccessfully) in the District Court, to avoid liability on a home contents insurance policy and a motor vehicle policy, on the basis that there had been material nondisclosure by the respondents.

BACKGROUND FACTS

(i) The motor vehicle insurance

[2] In November 1992, Mrs Brightwell (then Ms Pilcher) took out insurance on a Toyota Corona car with State Insurance Ltd (State). This was prior to her marriage to Mr Brightwell. That policy was renewed in 1993 and 1994. After Mr & Mrs Brightwell married, on 13 March 1995 the couple purchased a Toyota Hilux utility as a replacement vehicle for the Toyota Corona. An application was made to State for replacement motor vehicle insurance cover, specifying Mr & Mrs Brightwell as co-insured. Mr Brightwell disclosed in the proposal that he had been convicted on two drink/driving charges. State accepted cover in respect of Mrs Brightwell only.

[3] That motor vehicle insurance policy was renewed each year through to 28 October 1997. Mr & Mrs Brightwell then replaced the Toyota Hilux with a Mitsubishi Magna car. The couple again jointly applied for insurance with State.

[4] On this occasion, Mr Brightwell made a proposal over the telephone. The State employee put a number of set questions to him, and recorded the answers. To the question, “Do you or does any other person who will drive the vehicle have any conviction or pending prosecution for a criminal offence likely to affect the acceptance of this insurance?” The answer was noted as “no”. And to the question, “Is there any further information likely to affect the acceptance of this insurance?” The answer was given as “no”.

[5] State accepted this proposal for both Mr & Mrs Brightwell, but with Mr Brightwell being covered subject to a (higher than normal) excess of $2,000.

[6] Some three months later, Mr Brightwell fell asleep at the wheel of the Mitsubishi. It ran off the road and the vehicle was badly damaged.

[7] Mr Brightwell then completed a claim form which included the question, “Have you had any traffic or criminal convictions in the last 10 years?” The question was ticked affirmatively, but only the two drink driving offences were disclosed.

[8] State subsequently obtained a full conviction schedule for Mr Brightwell. It can be summarised, as follows:

Offence Date	Offence	Result Date	Result
23 August 1990	Cultivation of cannabis Possession of cannabis	16 October 1990	Fined $600 Fined $100
12 April 1991	Possession of cannabis	22 April 1991	3 mths periodic detention
1 August 1991	Excess breath alcohol	20 August 1991	1. Fined $1000 2. 8 mths disqualified driving
16 May 1992	Excess breath alcohol	26 May 1992	1. 6 mths periodic detention 2. 2 yrs disqualified/driving 3. 6 mths supervision
30 October 1992	Wilful damage	24 November 1992	1. Fined $200 2. Reparation $832.38
11 September 1993	Threatens to kill/do GBH (firearm) Presents firearm	1 June 1994	Fined $200 Conviction and discharge
27 July 1996	Common assault Assault person with blunt instrument Common assault	5-6 December 1996	1. Fined $750 2. 7 mths periodic detention 3. 1 year’s supervision 7 mths periodic detention Conviction and discharge
20 March 1998	Common assault	6 May 1998	Fined $400

[9] State declined to meet the (agreed) quantum of damage of $10,988 to the vehicle. Mr & Mrs Brightwell then claimed that sum and interest at 11% per annum thereon from the date the claim was declined (19 February 1998) to the date of judgment.

(ii) The home contents insurance

[10] On 18 October 1999, Mr Brightwell submitted a proposal to State for home contents insurance. It was common ground that there were two questions in the proposal which are relevant to the matters at issue with respect to this policy.

“Q. Do you or any of your family who live with you have any conviction or pending prosecution for a criminal offence likely to affect the acceptance of this policy? If ‘Yes’ give full details.

A. No.

Q. Is there any further information likely to affect the acceptance of this insurance? If ‘Yes’ give full details.

A. No.”

[11] The proposal contained the usual declaration (which was signed by Mr Brightwell) that:

“I declare that

(a) To the best of my knowledge, the details given in this proposal are true.

(b) I have not withheld any facts which might affect the acceptance of this insurance.”

[12] On 7 June 1996 there was a fire at Mr & Mrs Brightwell’s home. It caused extensive damage to their possessions.

[13] On 17 June 1996 a claim form was completed by Mr Brightwell. That claim form did not specifically call for disclosure of any information from Mr & Mrs Brightwell in relation to their conviction history. State in fact paid out the sum of $37,267.

[14] In March 1998 - after it had become aware of Mr Brightwell’s full criminal record - State notified Mr & Mrs Brightwell that it had elected to avoid this policy and that it intended to reclaim the monies it had paid out.

THE JUDGMENT IN THE DISTRICT COURT

[15] Thus it was that, in the form in which the proceedings came before the District Court, State sought to recover an (adjusted) figure of $36,977.33; and the Brightwell’s counter-claimed for $10,998, on the motor vehicle policy.

[16] As to the law, Spear DCJ began by noting certain often cited passages from Quinby Enterprises Ltd v General Accident Fire & Life Assurance Corp [1995] 1 NZLR 736 at 739 per Barker J (a fact must be disclosed if the prudent insurer would regard it as material in deciding to grant cover); and from the decision of the Court of Appeal in Misirlakis v New Zealand Insurance Co Ltd (1985) 3 ANZ Insurance Cases 60-633 at pp78,896-78,897 (whether criminal convictions are material to the particular risk can only be determined in light of all the circumstances existing at the time the proposal is completed). He also referred to Back v National Insurance Company of NZ Ltd [1996] 3 NZLR 363, 371.

[17] The Judge further referred to “the statutory attempt at limiting what has often been considered to be an inflexible and often harsh approach by the common law to the issue of non-disclosure” in ss5 and 6 of the Insurance Law Reform Act 1977.

[18] As to the home contents policy, State’s case turned upon whether:

• There had been non-disclosures by Mr Brightwell; and,

• Whether those items were material.

[19] The Judge found that Mr Brightwell was bound to disclose all these convictions. There is no cross appeal on that point before me.

[20] The Judge then held that:

“. . . having regard to Mr Brightwell’s age at the time of the offences, the low level of criminality that must have been involved having regard to the penalties imposed, the change in circumstances - Mr Brightwell presenting in October 1995 as a young married man obviously attempting to set up home with his wife - the convictions should not have unduly troubled a prudent insurer when deciding what premium to place on insurance cover or whether to provide cover or not. I accordingly find that they were not material on the prudent insurer test, bearing in mind that the onus was on State Insurance to establish materiality on the balance of probabilities.”

[21] It is how the Judge reached that conclusion, on the evidence before him, which was the principal focus of the appeal with respect to this policy.

[22] State had called three expert witnesses. First, the Manager of the Waikato branch of State, Mr James, gave evidence as follows:

“State . . . would not have accepted the proposal if all these convictions had been disclosed. The non-disclosed convictions would be relevant to any insurer’s assessment of what is often termed as the “moral risk”. This relates to the general character and personality of the insured. The convictions would suggest to any prudent insurer that Mr Brightwell has a marked disregard for the law and was inclined to be violent and to cause property damage.” (Italics added).

[23] A Mr Davie, the Manager of AMI, agreed that the six charges listed would have raised:

“ . . . . serious questions as to the character of the insured. As a general rule, when underwriting contents insurance cover, AMI is looking to identify customers of good moral character. While the occasional conviction may be acceptable, in this case a total of 6 criminal convictions of the type listed, within a five year period prior to the proposal, would certainly mean rejection of the contract by any branch of AMI Insurance.”

[24] And a Mr Hemmings, the Branch Manager of NZI in Hamilton, said:

“The main problem with the convictions is that they were all within about seven years of the commencement of the respective insurance policies. Where a person has incurred a number of convictions at a young age, but then comes to us at the age of about 35 years with a record showing no convictions in the previous 10 years, we will often be prepared to insure him/her on the basis that the applicant has matured, and is therefore a better risk. However, in this case, NZI would not have been interested in insuring Mr Brightwell because of the large number of serious convictions incurred steadily over the seven year period prior to the commencement of the respective insurance policies.”

The Judge dealt with this evidence in this way:

“What is remarkable in this case is the reliance of all the insurance managers called to give evidence for State Insurance on just the fact of the conviction and the description of the conviction. Not one of the insurance managers had regard to the penalty imposed by the court or Mr Brightwell’s age at the time the convictions were entered, or appeared concerned about any other circumstance surrounding the offending.”

[26] In making that observation, the Judge clearly had in mind a passage from Misirlakis, in the Court of Appeal, to which I have already referred. Richardson J for himself, McMullin and Thorpe JJ had there said:

“Whether criminal convictions are material to the particular risk can only be determined in the light of all the circumstances existing at the time the proposal is completed or the insurance is otherwise proposed for. This must include in the case of the convictions themselves the nature of the offending, the penalty, the age and circumstances of the person concerned at the time, and the time which has elapsed since the offending, and those matters must be assessed against all other relevant risk factors” (p78,897).

[27] Spear DCJ then said:

“As previously mentioned, while the combined weight of the evidence given by the insurance managers must be treated with considerable respect by any Court, the applied commercial policy of those working in the insurance field may not necessarily be compatible with what the courts consider to be the approach required of the hypothetical prudent insurer. It is conceivable that the insurance industry may occasionally find itself out-of-step with the courts in this respect. The failure of the insurance managers to address all those circumstances dilutes the value of their evidence in respect of the central issue of materiality.”

[28] In the result, the Judge found that the evidence of these “prudent insurers” was diluted by their failure to address all of the circumstances of the offending. In those circumstances, the Judge considered that he was entitled to take his own view on the issue. He found against State.

[29] As to the motor vehicle policy, the Judge noted that Mr Brightwell’s evidence was that the way his conviction history was dealt with by the State Clerk when making the proposal had left him under the impression that he had to state only his excess breath/blood convictions. This Clerk was not available to give evidence. The Judge said, “on the limited evidence before me on this issue . . . it is just as likely that Mr Brightwell was misled by the way the interview was conducted”. He therefore found against State, on the balance of probabilities, with respect to the proposal.

[30] As to the declinature with respect to the non-disclosure in the claim form, the Judge noted that there were 29 questions in that form. All (he thought) related to motor vehicles. He held that the question relied upon by State had “limited the field of enquiry” (as in State Insurance v Peake [1991] 2 NZLR 287 and State Insurance General Manager v Hanham (1990) 6 ANZ Insurance Cases 60,990). The Judge therefore found in the Brightwells’ favour on this issue. He said that if he was wrong in that respect, and Mr Brightwell was required to disclose all his convictions, the 1996 convictions for assault would have been material and these additional convictions would have been “fatal” to Mr and Mrs Brightwell’s claim for indemnity.

THE POINTS ON APPEAL

[31] These were framed as follows:

“[a] The District Court Judge wrongly applied the test for materiality in assessing State Insurance’s claim of non-disclosure prior to inception of the Home Contents Insurance Contract;

[b] The Judge’s decision on the materiality of Mr Brightwell’s convictions was against the weight of evidence;

[c] That the Judge’s decision on the materiality of Mr Brightwell’s convictions was made without proper evidential foundation;

[d] That the District Court Judge was wrong to find that question 10 of the State Insurance claim form limited the obligations of Mr Brightwell to disclose only traffic related convictions in the claim form.”

[32] Mr Turner readily agreed that the heart of the first three points (relating to the home contents policy) all go to the way in which Spear DCJ handled the insurer’s evidence in this case. The submission is, essentially, that the Judge set aside entirely the expert evidence, and simply substituted his own view of what a prudent insurer would have done.

[33] The central issue on the motor vehicle policy was whether the Judge had ignored, or artificially limited, a relevant, and unambiguous question.

THE LAW RELATING TO MATERIALITY

[34] The law under this head was not, as I understood counsel, in dispute. I can therefore deal with it in short form. A person applying for insurance must disclose all material facts to the insurer (notwithstanding the absence of specific questions). That person is bound to make full disclosure of all facts within his or her knowledge that would be material to the mind of a prudent insurer. Whether a fact is capable of being material is a question of law. Whether it is material is a matter of fact. Criminal convictions will generally be material to the particular risk but each case turns on its own facts and that issue can only be determined in light of all the circumstances existing at the time that the proposal is completed.

[35] If authority is required for these propositions, I refer to Misirlakis v New Zealand Insurance Company Ltd (supra); Benjamin & Anor v State Insurance Ltd (1998) 10 ANZ Insurance Cases 61 ,414; State Insurance v McHale [1992] NZLR 399; and Wayne Wilkinson Insurance Ltd v Kaiaua Downs Ltd [1995] 8 ANZ Insurance Cases 61-248.

[36] The onus of proof of materiality is on the insurer. The test is not that of the particular insurer, but that of the “prudent insurer”. It follows that neither the opinion of the particular insured nor the opinion of the particular insurer is decisive of the issue of materiality. A decision as to whether a given fact is, or is not, material depends upon the trial Judges own appraisal of the relevance of the disputed fact to the subject matter of the insurance. Not everything that is of “interest” to an insurer is material. Information is material when it would affect the ultimate decision of the insurer in terms of acceptance or rejection of insurance, the setting of premiums and the attachment of conditions (see Barclay Holdings Australia Pty Ltd v British National Insurance Company Ltd [1997] 4 ANZ Insurance Cases 60-770; [1987] 8 NSWLR 514 (CA)).

THE USE OF EXPERT EVIDENCE IN MATERIALITY CASES

[37] I heard some argument by counsel as to the role of the Judge and the use of expert witnesses on the issue of “materiality”. And given Mr Turner’s argument that the expert evidence had been set aside altogether I need to say something about the law on this issue.

[38] The starting point with respect to expert evidence in insurance law is usually said to be Carter v Boehm (1976) 3 Burr. 1907; 97 ER 1162. There, a broker had given evidence that, had he seen two letters describing the nature of the fort to be insured, the insurance would not have been taken. Lord Mansfield CJ said:

“It is mere opinion, which is not evidence. It is opinion after an event. It is opinion without the least foundation from any previous precedent or usage. It is an opinion which, if rightly formed, could only be drawn from the same premises from which the Court and jury were to determine the cause: and therefore it is improper and irrelevant in the mouth of a witness” (ER 1168-1169).

[39] Lord Mansfield’s view did not prevail. By the nineteenth century, the law could be firmly stated by Lord Tenterdan CJ in Rickards v Murdock (1830) 10 B&C 527; 109 ER 546, as being:

“I know not how the materiality of any matter is to be ascertained but by the evidence of persons conversant with the subject-matter of the enquiry.” (ER 552).

[40] In this century, there is ample authority, at the highest level, that expert evidence is admissible in insurance causes going to “materiality” (See e.g. Thames & Mersey Marine Insurance Co Ltd v Gunford Ship Co. [1911] AC 529 (HL); Mutual Life Insurance Co. of New York v Ontario Metal Products Co. Ltd [1925] AC 344 (PC)).

[41] The way in which expert evidence may assist the Court in materiality cases can perhaps be categorised under two heads:

• as going to the proposition that the fact not disclosed affected the particular risk;

• as going to the proposition that the insurer would have been influenced to charge a higher premium, or imposed other conditions.

[42] As to the first category, each case will depend on its own facts. It may be that what is at issue is the (possible) causal connection between the event and the risk. Expert evidence can be of real assistance in such an instance. Otherwise, the trier of fact is often left to his or her own judgment.

[43] As to the second category, there is often a blurred line (and consequential difficulty for the Judge) as to whether the evidence is being led as to a general practice within the industry or whether it goes to the practice of the particular insurer. The latter is not necessarily inadmissible - the insurer may be able to show a “pattern” as to how (say) drink/drivers are dealt with by it for insurance purposes (as, for instance, a distinctive scale of “loading” or additional “excess”) - but is generally received with real caution, as being self-serving.

[44] The decision of the Court of Appeal in Misirlakis (which is binding on me) patently requires consideration - in relation to “convictions” - of the “real” facts of those convictions. Although, at first blush, that may seem artificial - it is, after all, routinely difficult for even a subsequent sentencing Judge to ascertain what really lay behind prior convictions and sentences from a criminal record - the prudent insurer test is itself an enlargement on the question of materiality. It poses the question: if the true facts had been known (not just part of them), what would the prudent insurer have done?

[45] The evidence in this case was very thin. There was no expert evidence for the Brightwells. Two of the “experts” for State spoke only to the (general) relevance of convictions to the moral hazard. Mr James (rightly) in my view emphasised the conviction for wilful damage to property.

[46] The Judge accepted - as did all counsel - that all the convictions ought to have been disclosed. The question for the Judge, in terms of the Misirlakis formula, was whether the nature and outcome of the convictions was such; whether sufficient time had passed; and whether there had been such a change of circumstances that he could appropriately say that the undisclosed convictions were no longer “material”.

[47] The Judge said “those familiar with the workings of the District Court and its summary jurisdiction would appreciate that the penalties imposed for these offences indicate that they were offences of the individual type right at the lower end of the scale of seriousness”. He acknowledged that the December 1996 convictions would have been material - they were serious - but they were after the relevant date of the home contents policy of August 1996.

[48] This is an appeal. Credibility was not in issue. It is certainly correct, as Mr Turner said, that this Court is in as good a position as the trial Judge to assess the evidence. But that does not justify this Court in interfering in the Judge’s finding of fact as to “materiality” unless it can be demonstrated that the Judge was plainly wrong, in the sense that the view taken by the trial Judge was inconsistent with facts incontrovertibly established by other evidence, or that he ignored, or inappropriately gave too much weight to, a particular factor. And the onus in that respect rests upon the appellant.

[49] This case was very marginal, for the Brightwells. The fact of the convictions themselves was relevant (they showed a propensity to break the law). When inquired into more closely - in the context of the risk posed in relation to a home contents policy - Mr James was surely correct that the offence of the greatest concern had to be the wilful damage conviction in 1992. The fine was $200, and reparation of nearly $1,000 was ordered. That is hardly an insignificant matter. But, it was seven years before the proposal, and Mr Brightwell’s life had moved on. The fact that (subsequently) he has been shown still not to be fully law abiding had to be set to one side. The Judge was correct to view the case from the temporal standpoint he did.

[50] I do not know what view I would have taken if sitting at first instance in this case. It does not matter. From an appellate standpoint, there was a rational and supportable basis for the Judge’s holding: the relevant convictions were well removed in relevant point of time, and Mr Brightwell’s personal circumstances had changed. In my view, it cannot be said, on appeal, that the Judge was plainly wrong. The judgment must stand, on the footing that it should not be displaced, on appeal. But this judgment should not be taken as providing comfort to other proponents.

[51] The appeal, so far as it relates to the home contents policy is therefore dismissed.

THE MOTOR VEHICLE CLAIM

[52] Under this head State asserts that there has been false information in support of a claim. It asserts that (by reason of the particular policy) it is entitled to decline the claim, as distinct from avoidance of the policy from its inception, for material non-disclosure in the proposal.

[53] It is convenient to note here that during the argument Mr Turner sought to enlarge the grounds of appeal, to catch also material nondisclosure relating to the proposal. I allowed him to make submissions de bene esse and I afforded Mr O’Neill an opportunity to reply. I said I would deal with the prospective enlargement of grounds in this judgment. In the result, I am firmly of the view that this attempt to enlarge the grounds of the appeal (really only in face of this Court) was inappropriate. This was, after all, an appeal by a well established commercial organisation, and one in which submissions had been required from counsel in advance. I therefore approach the issues relating to this policy on the footing of the original points on appeal. As it transpires, in the view I take of the issue as originally advanced, this point becomes academic.

[54] It is important to note the precise issue which was before the Judge under this head. The relevant motor vehicle policy contained the usual provisions making the truth of the statements and answers in the proposal “or any other document” (which would include a claim form) a condition precedent to any liability on State’s part. There was also a provision for the avoidance of fraudulent claims, on “any false declaration or statement in support thereof”.

[55] Although at first blush, it may seem harsh that the proposal could be lawful, but the claim itself could still be challenged, that is not so. In the very nature of things, insurers are (regrettably) subjected to a high incidence of false claims. In Australia, it has been suggested that the economic effect of insurance fraud is to add $70 to the cost of every general insurance policy issued in that country (Baldock, “Insurance Fraud”, Paper No. 66, Australian Institute of Criminology). And, in the United States, some studies have suggested 25% of insurance payouts are on account of dishonest claims. (See Michael Clarke, “The Control of Insurance Fraud” (1990) 30 British Journal of Criminology 1,7).

[56] In the early days of the insurance industry it was common for insurers to require a certificate under the hand of the clergy as to the general trustworthiness of the person making the claim. Subsequently, insurers modified that practice (which was of course discriminatory) and began to make the truth of the claim form a condition precedent to liability under the policy; and to insert fraudulent claim clauses. This is today a standard feature of insurance policies. This can work hardship for an assured - a whole claim can be lost, even though the false statement was only as to part. (See, the speeches of their Lordships in Lek v Mathews (1927) 29 Lloyds List Law Rep. 141).

[57] There is another and practical rationale for supporting these disclosure clauses on claim forms, which does not seem to attract commentary in the treatises. The information given in a claim form is critical. If, for instance, an insurer is alerted (even as late as the claim form) to the fact that an insured has been a cannabis user, the insurer might wish to investigate whether, on the particular occasion, the insured had been involved in drug abuse. As Mr Byrnes’ evidence in this case shows, the insurer in fact investigated the possibility that alcohol was a factor in Mr Brightwell’s car accident - but he did not know about the past cannabis use.

[58] The way Mr O’Neill put the Brightwell’s case in the District Court is recorded in his written opening. First, he said the fact of the convictions was not “material” in relation to question 10. Secondly (and he said “more importantly”) question 10 itself did not require Mr Brightwell to divulge all those prior convictions.

[59] The argument for State was that the convictions were highly relevant; and that question 10 was direct and unambiguous. Indeed it was demonstrated that that question had been refined into that form through hard experience in litigation in other cases.

[60] In this Court, Mr O’Neill took no issue with the Judge’s holding that the convictions were material, if they were required to be disclosed. There was no cross appeal on that point. Mr Turner argued that it is impossible to ask the question in any plainer terms.

[61] Quite where the suggestion that State had “limited the filed of inquiry” on the claim form came from, is not clear to me. In the lower court, that argument had been advanced with respect to the proposal, and upheld. But to jump from that to the claim form - as the Judge seems to have done - is a long leap. And it was never pleaded that there was some kind of estoppel that the understanding which applied to the proposal, applied with equal force to the claim form. It appears to me that the Judge took the argument under one head (the proposal) and applied it to a subsequent document (the claim form). The fallacy is that the two documents serve different purposes, and required their own distinct responses.

[62] The question asked was direct. It referred to “traffic or criminal convictions”. The question required an honest answer. It did not receive one. The question was not somehow modified by the context of the claim form as a whole. It had a proper “stand alone” purpose of its own: it went to the Brightwell’s own probity, in the context of a claim.

[63] In the result, the judgment for the Brightwells on their counterclaim cannot stand.

CONCLUSION

[64] The appeal is allowed, in part. To give effect to the holdings of this Court, the judgment in the District Court is set aside in its entirety. The following are substituted therefore:

(i) The judgment for the respondents on their counterclaim of $10,998 having been set aside, in its entirety, State will have costs according to scale as on a claim for $11,000 in the District Court, together with its disbursements if necessary as fixed by the Registrar.

(ii) The respondents will have judgment against State on its claim of $36,977.33, in the District Court with costs according to scale as on a claim of $37,000 in that Court, together with their disbursements if necessary as fixed by the Registrar.

(iii) In this Court, both parties have succeeded in part. There will be no order for costs in this Court.