Taylor v Asteron Life Limited

[2019] NZHC 978

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2015-485-1032

[2019] NZHC 978

BETWEEN

PETER JAMES TAYLOR

Plaintiff

AND

ASTERON LIFE LIMITED

Defendant

Hearing:

11–15 February; 18–20 February 2019

Appearances:

A C Beck for the Plaintiff

C M Meechan QC and A Borchardt for the Defendant

Judgment:

7 May 2019

JUDGMENT OF COOKE J

Table of contents

THE KEY FACTS[4]

THE POLICY[14]

Total Disability Benefit[16]

Partial Disability Benefit[21]

THE PLAINTIFF’S CLAIMS FOR A DECLARATION[25]

Does Mr Taylor suffer from a sickness?[28]

Was Mr Taylor Totally Disabled?[37]

Was Mr Taylor Partially Disabled?[49]

Meaning of Monthly Earned Income[52]

Relevant calculation[57]

DEFENDANT’S COUNTERCLAIM[65]

The correct legal framework[66]

Did Mr Taylor breach his obligations?[71]

The representations about work[74]

Statements about income[83]

Remedy – restitution[96]

Was the contract cancelled?[99]

What should be restituted?[104]

Change of position[109]

TAYLOR v ASTERON LIFE LIMITED [2019] NZHC 978 [7 May 2019]

Karitane house[115]

The motor vehicles[117]

Overseas travel[120]

Conclusion on change of position[123]

CONCLUSION[124]

[1]                  For many years the plaintiff, Mr Peter Taylor, undertook business on his own account as an insurance broker. He also took out his own income protection insurance policy. In July 2010 he made a claim under that policy as a consequence of significant medical problems. Cover was accepted by the insurer, Asteron Life Ltd (Asteron), and he was paid certain insurance benefits until September 2014 when Asteron suspended payment.

[2]                  Mr Taylor commenced these proceedings, and in a two page statement of claim seeks a declaration that he is entitled to continuing benefits under the policy, an order for claimed arrears, and other related orders. In a four page statement of defence and counterclaim Asteron denies Mr Taylor is so entitled, and seeks restitution of all payments previously made under the policy. Asteron says that in his claim form and the subsequent progress reports Mr Taylor reported that he was not working, or only undertaking very limited work, when he in fact was working more extensively. This is said to breach his duty of utmost good faith. In a four page defence to the counterclaim/reply Mr Taylor denies this, and pleads defences to the counterclaim including a change of position defence.

[3]                  Notwithstanding the apparently confined nature of these disputes, and the brevity of the pleadings, there are a number of issues to be addressed. Moreover in opening Mr Beck for the plaintiff advised that there was a very stark difference in the positions of the parties, as Asteron was contending that Mr Taylor had acted fraudulently, and Mr Taylor contended that Asteron was failing in its duties in a highly inappropriate way.

THE KEY FACTS

[4]                  Whilst there are important disputes as to fact arising in the proceedings, certain core facts are not in dispute.

[5]                  Mr Taylor commenced work as an insurance broker after leaving school and following a short period of study at Otago University. He worked for insurance companies, including Sun Alliance Life, opting not to accept a salary but to be effectively self-employed. Ultimately he resigned all management positions with Sun Alliance and located his broking business in Cumberland Street, Dunedin.

[6]                  In October 1992 he completed an application for income protection insurance with Sun Alliance. In it he described himself as self-employed and disclosed that his share of after tax earnings from his business was $75,500. He provided a balance sheet for verification. The balance sheet involved pages from profit and loss statements for “Peter Taylor Insurance Broker” to 31 March 1992, prepared by his accountants, Chambers Nicholls. They showed he had made a net profit for that year of $65,647.91 compared with $50,779.68 for the previous years. The revenues from this business included both life insurance commissions and fire and general insurance commissions, and some of the more significant expenditure included wages and salaries. By letter dated 5 July 1994 Sun Alliance confirmed placement of this insurance, and provided Mr Taylor with the relevant policy documents.

[7]                  Mr Taylor continued business as a self-employed broker thereafter. In July 2010 Mr Taylor submitted a claim against the policy. In the claim form he said that he had suffered from medical conditions of the kind covered by the policy. He indicated that he had stopped all work on 23 December 2009. The claim form included a section completed by Mr Taylor’s general practitioner Dr Marie Neylon. This supplied information in relation to the medical conditions, and the treatment, and indicated that Mr Taylor was first advised to cease work as a result on 23 December 2009. Asteron accepted the claim and commenced payments, including a significant backdated payment to the December 2009 date.

[8]                  Mr Taylor was required to provide progress reports to Asteron describing the current state of his medical condition, whether he had been able to work, what income he had earned from working and other matters. Such progress reports were provided in: August, September, October, November 2010; January, February, March, April, July, October 2011; January, April, July, October 2012; April, October 2013 and April

2014. Further reports were provided in October and November 2014 after Asteron stopped making payments under the policy in September 2014.

[9]                  By letter dated 19 May 2014 Asteron asked Mr Taylor to supply financial information. That request was repeated by letter dated 23 June 2014, and then again on 24 July 2014. By email dated 20 August 2014 Mr Taylor provided certain financial information including some signed accounts for the year ended 31 March 2014. The accounts so provided were for a limited liability company called Peter J Taylor and Associates Limited (the Company). They were not the accounts for Mr Taylor’s insurance broking business. It appears, however, that some of the commissions earned by the broking business were channelled through the Company. The Company accounts showed that it had made a loss.

[10]              Asteron then asked about commissions disclosed in these accounts that had been paid into, and then out of, the Company totalling $551,491.   By email dated   28 August Mr Taylor responded by asking Asteron to confirm why they needed any further information. By email dated 3 September Asteron explained that the insurance entitlement under the policy was subject to a deduction for the prescribed income that the insured earned while working. Asteron advised that it was not able to make any further payments under the policy until it could reconcile the claim, with a provisional calculation showing that Mr Taylor had been overpaid by $77,398.60.

[11]By email reply on 5 September Mr Taylor advised:

3. I have not been nor have received any income from any source other than Asteron.

…

5.     Please note that it is manifestly obvious that given your present view and adopted position that until this can be satisfactorily addressed and resolved to reinstatement of benefits or we both are able to reach an agreement in terms of application of policy that no other details requested by you will be forwarded from me.

It would seem illogical to forward other detail given your suspending policy entitlements until this particular matter can be resolved to satisfaction.

6.     It is unequivocally the writers view that you have stepped outside of the bounds of the policy in force in reaching the decision conveyed, that you

are manifestly incorrect in your assessment reached, that you are unnecessarily witholding benefit entitlements, that by your action and the decision conveyed to withold legitimate benefit entitlements under the policy in force you are and have caused me (the insured) absolute and totally unnecessary additional angst, hurt feelings, anguish and embarrassment aside from creating a totally unnecessary financial hardship resulting directly from your decision conveyed to suspend benefit entitlements.

[12]Mr Taylor then commenced these proceedings in December 2015.

[13]              Mr Taylor subsequently sold his broking business. In his brief of evidence he said this sale was completed on 1 June 2018. Under cross-examination he explained that it had been sold for [REDACTED], although there was an earn out period.

THE POLICY

[14]              The relevant insurance policy was an “Income Plan” policy between Mr Taylor and Sun Alliance Life Ltd (the Policy). The obligations of the insurer are now owed by Asteron. The Policy commenced on 1 August 1994 and is expressed to last until 28 February 2026. The original premium payable by Mr Taylor was $85.95 per month, although it was subsequently inflation adjusted.

[15]              There are two relevant categories of cover under the Policy — a Total Disability Benefit, and a Partial Disability Benefit — both of which have potential relevance.

Total Disability Benefit

[16]This is described in the following clause:

2.1Total Disability

If as a result solely of any Injury or Sickness you become Totally Disabled then we will pay you:

(a)   during the Full Pay Period, a monthly Total Disability Benefit of your Monthly Insured Income and,

(b)   during the 75% Pay Period, a monthly Total Disability Benefit of 75% of your Monthly Insured Income, reduced in both cases by any other income you receive from any other source in relation to:

(i)the Sickness or Injury that caused you to become Totally Disabled, and

(ii)retirement or superannuation benefits, and

(iii)your Monthly Earned Income.

In the event that a lump sum payment is received by you in lieu of any income due to you in respect of the Sickness or Injury that caused you to become Totally Disabled or from any superannuation or retirement fund, that lump sum will be deemed to be equal to a monthly income of 1% of the lump sum.

[17]              The policy defines Monthly Insured Income as one twelfth of the Annual Insured Income specified in the Schedule. For Mr Taylor, this was $75,500 per annum but was subsequently inflation adjusted.

[18]The Full Pay Period is 60 days, and the 75 percent Pay Period is through to age

65.  Accordingly in the present case a person who is Totally Disabled will get that amount for 60 days, followed by 75 percent of that amount ($56,625 of the initial amount p/a) through to age 65.1 That amount will be subject to abatement for the specified income earned whilst disabled as addressed below.

[19]              This benefit applies when, as a sole result of Injury or Sickness (both defined terms), the insured becomes Totally Disabled, which is defined in the following terms:

TOTALLY DISABLED means that you are unable to work in your usual occupation for more than ten hours per week.

[20]              The abatement for the specified income earned is important for the present case, particularly the abatement for income falling within cl 2.1(b)(iii). It is defined in the following way:

“MONTHLY EARNED INCOME” means your monthly pre-tax salary, commissions, bonuses and fringe benefits if an employee, or your monthly pre-tax earnings net of any business expenses necessarily incurred in deriving those earnings if a self-employed person.

Partial Disability Benefit

[21]This is defined in the following way:

1      As a result of the definition of Full Pay Period there is also an initial No Pay Period of 30 days.

2.2Partial Disability Benefit

If immediately following a period of being Totally Disabled which lasts at least fourteen days you cease to be Totally Disabled but become Partially Disabled by reason of the same Sickness or Injury which caused you to be Totally Disabled, then we will pay you:

a monthly Partial Disability Benefit of 75% of your Monthly Insured Income,

reduced by any other income you receive from any other source in relation to:

(i)      the Sickness or Injury that caused you to become Totally Disabled, and

(ii)     retirement or superannuation benefits, and

(iii)    two thirds of your Monthly Earned Income.

In the event that a lump sum payment is received by you in lieu of any income due to you in respect of the Sickness or Injury that caused you to become Totally Disabled or from any superannuation or retirement fund, that lump sum will be deemed to be equal to a monthly income of 1% of the lump sum.

EXAMPLE

Suppose while Partially Disabled, your Monthly Earned Income is 75% of your Monthly Insured Income and you have no income in relation to (i) or (ii). The Partial Disability Benefit from us is then 25% of your Monthly Insured Income, giving you a total income equal to 100% of your Monthly Insured Income.

[22]The term Partially Disabled is also defined in the following way:

PARTALLY DISABLED means that you are working in any occupation but, directly because of Sickness or Injury, you are only able to work to a limited extent such that your Monthly Earned Income is 75 percent or less of your Monthly Insured Income.

[23]              Significantly the key consequence of being Partially Disabled rather than Totally Disabled is that only two thirds of the Monthly Insured Income is abated.

[24]              The Policy appears to contemplate the Partial Disability Benefit becoming payable only after the insured is first Totally Disabled for a period of fourteen days. In other words the Policy has phases — first total disability (with a no-pay period, a full pay period, and a 75 percent pay period — with a deduction of 100 percent of

defined alternative income) and then partial disability (75 percent pay, less two-thirds of defined alternative income).

THE PLAINTIFF’S CLAIMS FOR A DECLARATION

[25]              Mr Taylor seeks a declaration that he is “entitled to receive continuing benefits under the policy” and an order directing the defendant “to make payments of benefits under the policy” together with payment of arrears since September 2014. That contemplates the Court calculating the entitlement. In closing Mr Beck for Mr Taylor argued that declarations could be made in a manner leaving questions of assessment or calculation to the defendant. But it seems to me that it is necessary to address all questions of entitlement under the Policy as claimed, at least to the extent that the Court is able to determine them. There will then be the further issue on whether any such entitlement is affected by Asteron’s counterclaim.

[26]              In order to assess Mr Taylor’s alleged entitlement it must be demonstrated that he meets the requirements for cover under the Policy, with the amount due to him being calculated for the purposes of ordering the arrears, as well as the future payment. The calculation of those entitlements is subject to a series of discrete questions in terms of the application of the Policy.

[27]              Mr Taylor’s claim only covers the period from September 2014. But it also seems to me that it is appropriate to address the entitlement before that date, including because it may be relevant to Asteron’s counterclaim.

Does Mr Taylor suffer from a sickness?

[28]              To receive a benefit for being Totally Disabled or Partially Disabled the insured must “as a result solely of any Injury or Sickness” become Totally Disabled or “by reasons of the same Sickness or Injury” then become Partly Disabled. The first question is whether Mr Taylor suffered, or suffers from a sickness. Sickness is defined as follows:

(e) “SICKNESS” means a sickness, disorder or disease  which  you  disclosed to us in your application, a copy of which is attached, or which first became evident on or after the Commencement Date specified in the Schedule.

[29]              In Mr Taylor’s statement of claim he alleges that he developed bone cancer in 2009 and then made a claim under the Policy. He also alleges that since developing bone cancer in 2009 he has been totally disabled in terms of the Policy entitling him to be paid benefits under the Policy. Asteron admitted that it had received such a claim made by Mr Taylor, but otherwise denied the allegations.

[30]              The only actual medical condition mentioned in the statement of claim is “bone cancer”. In his claim form, and the subsequent reports and accompanying medical information, a much more complex set of medical issues were outlined, and it became less clear  whether they included  bone cancer.  When  he came  to  give evidence  Mr Taylor described the effects of his medical conditions in some detail. That was particularly so in paragraph 25 of his brief of evidence. No medical evidence was called, however. The medical practitioners and specialists who authored letters and reports describing Mr Taylor’s conditions and the treatment of them did not give evidence.

[31]              That seemed to me to create a difficulty for Mr Taylor as the reports and other documents in the agreed bundle are not admissible as to the truth of their contents — they are documentary hearsay. Mr Beck did not accept that and argued that as a consequence of r 9.5(1)(a) of the High Court Rules 2016 the inclusion of those documents in the agreed bundle meant they were admissible, and once they are admissible they were admissible for all purposes. I do not accept that. Neither r 9.5, nor s 132 of the Evidence Act 2006 which concerns documents in the common bundle, make documentary hearsay admissible. They simply provide a mechanism to avoid the need to have documents formally proved in evidence. So the letters and reports are not admissible to establish the truth of their contents.2

[32]              The lack of any medical evidence significantly affects the ability of Mr Taylor to prove his claim. But it is not fatal to that claim. A plaintiff in Mr Taylor’s position can, by his or her own evidence, satisfy a Court that he or she suffers from a sickness or injury resulting in disability meeting the requirements of the Policy. The absence of medical evidence will make that task much more difficult, however. In the present

2      See Elizabeth McDonald and Scott Optican (Eds) Mahoney on Evidence Act and Analysis

(Thomson Reuters New Zealand, Wellington, 2018) at EV 132.02.

case that difficulty is compounded by the sparseness of the allegations in the statement of claim, and the lack of precision in the evidence given by Mr Taylor when describing the suggested medical conditions and when they emerged. Moreover, as I will explain in greater detail below, I found Mr Taylor’s evidence before me generally unreliable, and at times not credible.

[33]              It is difficult to identify the exact conditions which it is said Mr Taylor suffered from but they appear to include:

(a)A potentially cancerous growth in the bone of Mr Taylor’s right forearm.

(b)Cavernous haemangioma in the thoracic spine.

(c)A radiation burn suffered to Mr Taylor’s spinal cord as a result of radiotherapy treatment, causing severe neural pain.

(d)Infection complications caused by a medical pain stimulator fitted to Mr Taylor’s spine (which was subsequently removed), including a long period of infection after it was fitted.

(e)At least two episodes of meningitis arising from infections causing brain injuries.

(f)Swollen ventricles of the brain, and a cyst on the brain.

[34]              Mr Taylor described the impact of these conditions, and the treatment of these conditions and the impact on him. The evidence was not precise as to the medical conditions, or the order that they occurred, or over what periods. The main impact described by him was severe pain. He said that he was on methadone, and that he was on an increased dose of methadone in order that he could give evidence. He described other adverse effects, including difficulty with sleeping, and that he receives injections every six weeks from a neurologist, administered by long needles to the back of his head, to deal with the cyst and the swollen ventricles.

[35]              This appeared to move well beyond the allegation of bone cancer to a much more complex and compounding medical situation, which in part appears to have arisen from allegations of medical misadventure. In fact I did not understand his evidence to suggest he had bone cancer.

[36]              Mr Taylor’s evidence relating to his conditions and their effect was not challenged in cross-examination, however. In closing Ms Meechan QC for the defendant did not dispute that Mr Taylor suffered from sickness within the meaning of the Policy. For that reason, and notwithstanding the lack of clarity arising from his evidence, I accept that Mr Taylor was and is suffering from a Sickness as defined in the Policy, potentially entitling him to qualify for the Total Disability Benefit or the Partial Disability Benefit.

Was Mr Taylor Totally Disabled?

[37]              The next question relates to the extent of the disability, if any, caused by the sickness. More particularly, whether Mr Taylor was Totally Disabled or Partially Disabled within the meaning of the Policy. Mr Taylor’s calculation of benefits depends on the applicable category.

[38]              To be eligible for the Total Disability Benefit the claimant must be “unable to work in your usual occupation for more than 10 hours per week”. Mr Taylor claims to be so disabled. Under the Policy the main consequence of being Partially Disabled rather than Totally Disabled is that the abatement is reduced to two-thirds of Monthly Earned Income rather than all of that income. That makes partial disability potentially more financially advantageous. Whilst that initially might appear counter-intuitive, this structure is understandable. It encourages claimants to get back to work. Another way of describing this is that it avoids the potential “moral hazard” involved in financially incentivising a state of total disability.

[39]              Whilst the question of Total Disablement focuses on the “inability” to engage in work, evidence as to the work Mr Taylor actually engaged in is obviously highly relevant to his ability to do so. There was extensive evidence at trial directed to the extent Mr Taylor continued to work in his broking business. Documentary records were available, including emails and other correspondence, as well as telephone

records. Three former employees of Mr Taylor were also subpoenaed to give evidence by Asteron.

[40]              Mr Taylor gave evidence about his inability to work, which included him saying the following:

My role in the business

41.   Under the policy definition of "totally disabled", I am permitted to work for up to 10 hours per week while still being entitled to benefits.

42.   Since being diagnosed and initially treated in 2010 I have never been able to work properly or been fit enough to undertake work that exceeded the prescribed limit under the policy.

43.   Indeed I have not been able, nor have I, due the myriad health conditions suffered and sustained, being able to undertake over a protracted period any work whatsoever.

44.   On diagnosis, my behaviour altered essentially from working fulltime to working on an ad hoc basis only. Work consisted of occasional emails, interacting with staff members, taking phone calls only if put through and when home, making very occasional telephone calls and the odd visit from fellow MP. In the main and whilst at home Rhona would attend to work related matters as she could undertake the tasks and much was needed to be done.

[41]              The three subpoenaed witnesses gave evidence inconsistent with Mr Taylor’s account. The most significant evidence came from Ms Carol Tricker. She was the most senior employee, and had been working for Mr Taylor both before and after his illness. She has 30 years’ experience in the insurance industry. Mr Taylor’s evidence was that she had taken on most of the role that he had previously undertaken himself before his illness. Her evidence was that on average Mr Taylor worked four hours per day. Under cross-examination she was asked:

Q.    Now before he became ill he worked a large number of hours didn’t he?

A.    Sorry, he?

Q.    He worked a large number of hours in the business?

A.    Normal office hours, yes.

Q.    So he’d be in every day?

A.    Yes.

Q.    And after he became ill that pattern changed didn’t it?

A.    It did change initially. Then it changed back again.

Q. You were aware that he was heavily medicated at the time? Did you  know that?

A. No. Peter initially left the office and left me in charge when he had to have a discectomy for his back, and during that recovery six to eight weeks we didn't really see Peter at all. In fact we didn't see Peter. But then as he recovered from that we saw him and heard from him a lot.

Q. Now he says that as a result of his medication he was really unable to focus for any length of time, that he spends most afternoons mostly at home. Would that be right?

A.    Yes.

Q.    And that he used to come in with Rona and then go home at lunchtime with her?

A.    No he drove his own car in.

Q.    And –

A.    Rona would leave before Peter.

Q.    At lunchtime?

A.    Well Rona could leave at 11 o’clock. Half past 11. Peter may stay till one or two –

Q.    And –

A.    – initially. Things changed. It was very, it was fluid.

Q.    So there wasn’t a single pattern that operated the whole time?

A.    There was a pattern at the beginning which then changed and then it changed again.

Q.    And did you get the impression that Peter was having difficulty keeping up with things because of his illness?

A.    Not at all.

Q.    You –

A.    He had his finger on the button the whole time.

Q.    – you didn’t notice a sort of inability to focus and concentrate?

A.    No.

[42]              The discectomy referred to by Ms Tricker appears to have been carried out in early April 2010. Ms Tricker elaborated on the changing arrangements following the discectomy in her answers in response to questions from me. She said that the arrangements in the office changed, and that Mr Taylor then moved to having a greater interest in his other business interests. She said:

… So therefore he wasn’t in the office as much ‘cos he was doing that from home or Wanaka or Queenstown or wherever the businesses were. And then to slowly, basically he said to us and the underwriters, if you want to get me by phone you ring me at home predominantly in the mornings ‘cos I like to have a rest but I’m at home in the afternoon for other things. And then he

would, so then, so that’s what I mean by it changed because he wasn’t in the office as much as regularly but he was still there. I mean it was Peter’s business, he loved his business. He controlled every aspect of it. I would think that I was doing a renewal with the client and sending it out in the post, the next thing I’d get an instruction from him because he had contacted that very client, gone through what I’d done, and then sent it back to me with changes so he, he always had his finger on what was happening and so, I don't know about his health, he did tell me that he didn't feel well, but his volume of work never reduced, his input into the office never reduced, the girl that was hired to do accounts knew nothing about insurance. She was constantly having to do life proposals, medical for him, so yes, he was there, his presence was there. Might not have physically been there, so that’s how I remember he changed, mmm.

[43]              The thrust of this evidence is confirmed by the other subpoenaed witnesses. Ms Kerri Bridgman worked for the business between April 2011 and October 2012 as an assistant broker. She said that Mr Taylor was directly involved in all aspects of the business. She did not agree with Mr Taylor’s assessments in the insurance claim reports on the amount of time he worked, and said that he worked more like four hours per day even though he was not present in the office.

[44]              Ms Tracy Knight worked part-time for the business as a claims manager during 2012. She said that Mr Taylor was very much the boss and appeared to be the person running the business, and in response to a report in which Mr Taylor had said he worked three to five hours per week said:

On the basis of my own involvement with Peter in that period and the involvement observed him having with other staff Peter was working significantly more hours than that. I continued to have frequent contact by telephone, in person and through the long hand-written notes that Peter continued to send me telling me how he wanted claims to be handled.

[45]              The evidence of these employees is also confirmed by the documentary evidence that has been provided. Initially Asteron sought to place this all before the Court in the form of evidence from Mr Andrew Strong, one of its former solicitors, commenting on what the documents revealed about the extent he was working, but I indicated to Ms Meechan that it seemed to be inadmissible opinion, and this evidence was not led. Nevertheless the documents themselves were admitted by consent. They involve emails and other written communications that confirm that Mr Taylor was still actively involved in his insurance business. I accept Ms Meechan’s submission that the evidence demonstrates he retained responsibility for the most important clients,

and clients that were more demanding. He also gave direction to other staff. By itself this documentary evidence does not allow a calculation of the number of hours worked to be made. But it demonstrates that Mr Taylor was working extensively in the business, and that his evidence describing far more limited activities is not accurate.

[46]              I generally found Mr Taylor’s evidence, and his answers in cross-examination, unreliable, and at times not credible. His explanations for the activities recorded in the documents varied — he argued that what he was doing was not work at all, that it was not the same work as he had previously undertaken, or that if he did work it was within the 10 hour limit. His answers were inconsistent with both the documentary records, and the evidence of the three subpoenaed witnesses. Ms Tricker’s evidence must be particularly significant in this respect given Mr Taylor’s assertion that she essentially took on the roles he could no longer perform. It is clear that apart from the period immediately surrounding his discectomy Mr Taylor was able to, and did in fact, work for more than 10 hours a week. It is possible that there were other short periods of total disability, but Mr Taylor has not provided sufficiently clear evidence for me to identify them, or to identify when they took place.

[47]              For these reasons I find that Mr Taylor was not Totally Disabled within the meaning of the Policy.

[48]              Even if he had been it would have been necessary to deduct any relevant Monthly Earned Income, an issue I will return to below.

Was Mr Taylor Partially Disabled?

[49]              Mr Taylor could be entitled to the Partial Disability Benefit if “directly because of Sickness” he was “only able to work to a limited extent such that your Monthly Earned Income is 75 per cent or less” of his Monthly Insured Income. The definition of Partial Disability has two components. First the insured must show that because of the sickness or injury they are only able to work to a limited extent. Second they must demonstrate that limitation results in the insured only earning 75 per cent of the income described by the Policy.

[50]              Significantly the key measurement of the disability changes from the number of hours worked to the impact on the insured’s income. The Policy also still requires the abatement of “your monthly pre-tax earnings net of any business expenses necessarily occurred in deriving those earnings if a self-employed person”. For Partial Disability only two-thirds of that income is deducted.

[51]              Ms Meechan argued that, given Mr Taylor had made claims on the basis of total disability, he would not be entitled to succeed in having an entitlement based on partial disability. It is true that that is effectively what was found in van der Noll v Sovereign Assurance Co Ltd and Percy v Sovereign Assurance Co Ltd.3 In the present case, however, there are not the forensic challenges in assessing partial disability as there were in those cases. Here both total Disability and Partial Disability require the rebate of Monthly Earned Income, and the Partial Disability calculation turns on that Monthly Earned Income.  They are closely interrelated entitlements.  For that reason I would not have declined the plaintiff a declaration of entitlement to partial disability benefits simply because that is not what he initially claimed. I proceed to consider the entitlement on its merits.

Meaning of Monthly Earned Income

[52]              As indicated, the rebate for Monthly Earned Income applies to both the Total Disability and Partial Disability entitlements. Mr Beck raised an interpretation issue concerning the abatement. The business of someone who is self-employed may continue to operate profitably notwithstanding that they are disabled. The income may arise as a consequence of the efforts of other employees, and the business operations that have been established. Mr Beck argued that the Monthly Insured Income abated should relate solely to income arising from Mr Taylor’s own efforts. In support of this argument Mr Taylor called evidence from Mr Graeme Lindsay, an experienced life insurance advisor.

[53]              It is well established that contractual language must be interpreted in context, and that the context can have a significant influence on the interpretation to be given

3      van der Noll v Sovereign Assurance Co Ltd [2013] NZHC 3051 at [147]–[154]; and Percy v Sovereign Assurance Co Ltd [2014] NZHC 1573 at [133]–[142].

to it.4 The language used is nevertheless centrally important.5 Here, it seems to me that the language used in the definition of Monthly Earned Income captures precisely what the parties would have intended given all the surrounding circumstances. The definition refers to Mr Taylor’s monthly pre-tax earnings from his business, net of any business expenses necessarily incurred in deriving those earnings. That is so whether or not the earnings are a consequence of his own efforts, or those of his employees, or not. In the present case this has essentially been calculated in the signed annual accounts prepared by Mr Taylor’s accountants.6 This approach is consistent with the commercial purpose of the contract, as what becomes insured is the level of net income earned from the business, and the impact of the disability of the insured person on that income. On the face of it that is an answer to Mr Beck’s submission.

[54]              I accept that in some cases it might be possible to interpret the definition of Monthly Insured Income to give it a more specialised meaning to correspond to what the parties must have intended. That may arise when it is clear from the context that the insured had only obtained cover protecting more specific income, such as drawings that he or she is taking from the self-employed business, with those no longer being taken as a consequence of disability. In other words the context may suggest the income protected by the insurance involved a more precise category of earnings, or a salary taken from a self-employed business.

[55]              That argument is not available here, however. In Mr Taylor’s proposal form for the purpose of initially establishing insurance cover he indicated that his income from his self-employed business was $75,500. The form said that the income was verified by the balance sheet he provided. The balance sheet for his self-employed business to 31 March 1999 showed an annual profit of $65,647.91, compared to

$50,779.68 in the previous year. Thus when the contract was entered, both parties were aware that the relevant income being protected reflected the entire net profit made by the broking business known as “Peter Taylor Insurance Broker”.  That is  an

4      Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]– [63]; and Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.

5      Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 4, at [63].

6      There are some adjustments properly made to the figures from these accounts given the Policy definitions, but they are not material to the ultimate outcome.

important surrounding circumstance taken into account when interpreting what the essence of the bargain was, and what the parties meant by the words they used.

[56]              So there does not seem to me to be any reason to depart from the ordinary meaning of the terms used in the Policy — and particularly the definition of Monthly Earned Income — which fully corresponds to the intention of the parties viewed in its wider context. The full amount of the net profit from Mr Taylor’s self-employed business gets deducted from the prescribed benefit irrespective of any arguments that it was not the product of his own endeavours, or solely his own endeavours. The adverse event that Mr Taylor was insuring against was that his earnings from his business would be eliminated or reduced as a consequence of his sickness or injury.

Relevant calculation

[57]              It is necessary to calculate the effect of the consequential abatement. The defendants called expert accounting evidence from Mr Shane Hussey directed to the effect of deducting the Monthly Earned Income on this interpretation. His exercise was complicated by the fact that, during discovery, the plaintiff discovered sets of annual accounts from the broking business which, for the reasons I address below, falsely represented that the broking business made trading losses.

[58]              The plaintiff  subsequently  discovered  the  correct  financial  statements.  Mr Hussey then provided a table describing the financial results:7

7      The shading in the table, and the reference to “original” and “updated” financial performance results from the originally provided false accounts, and the “Hussey added Life Commissions” was Mr Hussey’s initial calculation of what had been excluded in the false accounts, subsequently confirmed by the correct accounts.

Table 5

Peter J Taylor Insurance Broker Statement of Financial Performanc Operating Income F & G Commissions Life Commissions Sales and renewals Hussey added Life Commissions	2008 (original) 400,732 238,548	2009 (original) 425,950 234,606	2010 (updated) 445,061 224,626	2011 (updated) 432,720 202,437	2012 (updated) 447,984 226,288	2013 (original) 725,216	2014 (original) 752,531
Total Gross Income	639,280	660,556	669,687	635,157	674,272	725,216	752,531
Expenses
Accounting fees	9,027	8,832	8,081	9,310	9,781	9,700	12,202
ACC/Workplace insurance	3,345	3,356	2,937	2,768	3,284	3,309	1,648
Administration fees	1,613	2,090	2,769
Advertising & sponsorship	8,181	11,394	3,174	1,975	1,687	3,873	1,572
Bank charges	3,417	6,114	4,336	3,381	3,437	3,675	5,210
Computer expenses	12,267	11,786	14,413	11,720	13,667	13,781	16,157
Donations	155	425	1,585	510
EFTPOS rental	69	146	212	150
Entertainment	3,905	6,054	9,283	5,879	5,138	3,755	4,481
Insurance	3,826	4,418	1,362	774	362	33,817	19,242
Interest	24,653	30,649	32,402	32,678	72,990	134,517	155,577
Lease computer	262	1,607	1,607	1,898
Legal	778	0	1,820	1,826	2,289	7,052	1,211
Loan fees	370
Motor vehicle	11,011	7,833	10,887	18,431	9,786	8,834	4,815
Carparks	5,941	4,104
Office expenses	27,016	32,965	28,644	31,888	34,003	30,173	27,054
Printing & stationery	7,941	8,441	7,575	7,146	5,407	7,862	4,969
Rent	15,550	18,950	24,314	24,656	24,654	24,654	24,654
Repairs & maintenance	62	1,985	98
Telephone and tolls	10,320	13,774	14,506	9,386	8,625	5,979	7,311
Travelling expenses	29,347	28,095	23,242	26,627	6,303	3,477	3,435
Travelling expenses - overseas	19,659	9,649
Wages and salaries	246,600	212,586	266,858	246,533	261,882	304,254	254,785
Total cash expenses	417,508	408,839	455,539	437,470	465,479	628,199	561,505
Depreciation and loss/gain on sale	80,976	73,583	64,823	33,857	53,386	(53,544)	25,013
Total expenses	498,484	482,422	520,362	471,327	518,865	574,655	586,518
Operating surplus	140,796	178,134	149,325	163,830	155,407	150,561	166,013
Other income
Interest received	10,722	10,856	2,745	2,223	6
Life commissions paid in advance	(83,909)	(42,287)	(32,670)	(48,359)
Sales & renewals paid in advance	(52,536)	(42,155)	(41,522)
Total other income	(73,187)	(31,431)	(49,791)	(39,932)	(41,516)	(32,670)	(48,359)
Net surplus	67,609	146,703	99,534	123,898	113,891	117,891	117,654
Profits expressed as Monthly
Earned Income (being 1/12th of the
annual surplus	5,634	12,225	8,295	10,325	9,491	9,824	9,805
Wages and salaries as % of
commission revenue	38.6%	32.2%	39.8%	38.8%	38.8%	42.0%	33.9%

[59]              This results in Mr Taylor’s monthly earned income being at the following levels:

Year	$
2008	5,634
2009	12,225
2010	8,295
2011	10,325
2012	9,491
2013	9,824
2014	9,805

[60]              This assumes that the monthly income was received evenly over the 12 months. Even abating only two-thirds of this income applicable for Partial Disability, the consequence is that all amounts due under the Policy were fully off-set by that abatement. No amounts were due to Mr Taylor.

[61]              The accounts before the  Court  only  cover  the  period  through  to  2014.  Mr Taylor’s claim for payment of the arrears covers the period from 2014 to trial. In the absence of the relevant accounting material to allow the deduction to be made it is not possible to make the calculation required by Mr Taylor’s claim. But in any event I have determined that Mr Taylor was not disabled by his sickness so that his insured income was affected. Put another way, to the extent that his illness has affected his ability to work, it has not adversely affected his income in a way covered by the Policy. For that reason alone, Mr Taylor’s claims should be dismissed.

[62]              This means I do not need to address a more difficult issue arising from the of the sale of the business in 2017. In Blanshard v National Mutual Life Association of Australia Limited Harrison J held in similar circumstances that the sale of a business which included a restraint of trade clause effectively disentitled the insured to further payments as it was the restraint of trade clause rather than the disability that prevented the insured from working.8 In an interlocutory judgment in the present proceedings Associate Judge Johnston observed that there was room for doubt whether the case was correctly decided on this point, including on the basis that it was “… difficult to imagine that the law is so maladroit as to prevent someone in [the insured’s] position

8      Blanshard v National Mutual Life Association of Australia Limited (2004) 13 ANZ Insurance Cases 61-621 at [44].

from selling their business years later because they could, by doing so, imperil their insurance entitlements”.9 I see some force in the Associate Judge’s views in a case where the insured qualifies for benefits under the Policy prior to sale. But there are difficult interpretation issues. Those issues cut both ways. Here the sale of the business also apparently eliminates the abatement otherwise to be made for the benefit of the insurer. To the extent that the Policy does not directly address the consequences of sale, from a practical point of view a potential sale may well be something that should be dealt with by further agreement between the insured and insurer.

[63]              In the present case, however, given that Mr Taylor had no entitlement under the Policy prior to the sale of his business there can be no suggestion that he is entitled to re-establish entitlements by virtue of the sale.

[64]For the above reasons the plaintiff’s claims are dismissed.

DEFENDANT’S COUNTERCLAIM

[65]              The defendant’s counterclaim raises two matters: first whether it is entitled to cancel the contract of insurance, or avoid any further liability under it; and secondly whether it is entitled to restitution of the amounts that it paid Mr Taylor. There is then Mr Taylor’s defence to that counterclaim, in particular in relation to restitution.

The correct legal framework

[66]              There is an initial question relating to the correct legal framework for addressing the right to cancel or avoid liability under an insurance contract for alleged breach of the duty of good faith, and also for addressing the insurer’s claims for restitution for amounts that it has paid under the insurance contract.

[67]              Ms Meechan presented the case for Asteron relying on common law principles to be found primarily in the decisions of the Courts of England and Wales. Mr Beck argued that such issues should be addressed within the legal framework that is to be found in the Contract and Commercial Law Act 2017 (the Act) which essentially re- enacted the regime formerly set out in the Contractual Remedies Act 1979. In

9      Taylor v Asteron Life Limited [2018] NZHC 2939 at [16].

response Ms Meechan accepted that Asteron’s claims could be dealt with under the machinery of the Act, and submitted it would not make a meaningful difference to the outcome. She did, however, refer to the uncertainties that have been identified in ascertaining the correct legal regime for such claims in New Zealand.

[68]              There is certainly uncertainty about the appropriate framework. The authors of Colinvaux’s Law of Insurance in New Zealand observe that “to comment that the law in New Zealand is in a confused state is something of an understatement” and that it is “unclear whether the remedy of avoidance for breach of the duty of utmost good faith is sui generis and not affected by the [Contractual Remedies Act 1979] or whether, for misrepresentation at least, it has now been replaced by cancellation”.10 Previous decisions of the New Zealand courts have not found it necessary to resolve what the overall regime is. For example in Blanshard v National Mutual Life Association of Australia Ltd the Court upheld claims that the insurer was entitled to restitution from the insurer by applying the principles of common law indicating that it was “… unnecessary to consider the applicability of s 9 of the Contractual Remedies Act 1979”.11 In Vero Insurance NZ Ltd v Posa the Court upheld marine insurance claims, and rejected the insurers claims of dishonest or incomplete claims by addressing the common law obligations of good faith, the Marine Insurance Act 1908, and the Insurance Law Reform Act 1977 on the basis that all three applied.12 The Contractual Remedies Act 1979 was not referred to.

[69]              It seems to me that the legislative reforms introduced by the Contractual Remedies Act 1979, and now continued by the Act, apply to insurance contracts just as much as other contracts. This is so for both misrepresentation, and for cancellation (including for breach). There is nothing in the terms of the legislation to suggest otherwise. The duty of good faith can be seen as an implied term of the insurance contract, and its application subject to a contractual analysis.13 To carve out exceptions

10 Robert Merkin and Chris Nicoll (eds) Colinvaux’s Law of Insurance in New Zealand (Thomson Reuters New Zealand, Wellington, 2014) at 4.6.1. See also Malcolm A Clarke Lies, Damned Lies, and Insurance Claims: The Elements and Effect of Fraud [2010] NZ L Rev 233, especially at 250 and 253.

11 Blanshard v National Mutual Life Association of Australia Ltd, above n 8, at [208].

12 Vero Insurance NZ Ltd v Posa [2008] 3 NZLR 701 (HC).

13 See Young v Tower  Insurance Ltd [2016] NZHC 2956, [2018] 2 NZLR 291 at [157]–[165]; and Rob Merkin Criminals, Fraudsters and Idiots: Are they Insurable? (2018) 24 NZBLQ 3 at [5.2].

in particular areas, and introduce a different set of technical rules in those areas creates undue complexity. Moreover the insurance law issues raised can all be addressed within the machinery in the Act, which establishes discretionary powers that can accommodate insurance law concepts.14 The authors of Colinvaux observe that the Contract and Commercial Law Reform Committee did not expressly address insurance contracts in its work leading to the enactment of the Contractual Remedies Act 1979.15 But the whole object of that legislation was to reform the law, in part to avoid complexity arising from having multiple sets of technical rules. The Act provides:

40 Sections 36 to 39 have effect in place of rules of common law and of equity

(1)Sections 36 to 39 have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation, repudiation, or breach.

(2)This section applies except as otherwise expressly provided in this subpart.

[70]              This section means what it says. Sections 36 to 39 deal with cancellation. In addition the Act goes on to detail the ability of the Court to grant relief following cancellation, which can include the kind of restitutionary award sought by Asteron here (s 43), and also deals with the defence of change of position such as that raised by Mr Taylor (s 47). It covers the field. Subject to other legislation that may also apply (such as the Marine Insurance Act 1908, and the Insurance Law Reform Act 1977) the Act applies to a contract of insurance just as much as any other contract. Moreover as Ms Meechan and Mr Beck agreed, all the issues that are alive in the present case can be addressed within the provisions of the Act. I proceed on that basis.

Did Mr Taylor breach his obligations?

[71]              Asteron alleges that Mr Taylor breached his obligations of good faith under the contract by making false statements in his forms provided with his claims. It also seeks restitution of what it paid out on that basis.

14 See [96]–[98], [104]–[106] and [109] below.

15     Merkin and Nicoll, above n 10, at 4.6.1(2).

[72]              Under s 37(1)(b) and (2) of the Act a party such as Asteron may cancel a contract if Mr Taylor had breached a term of the contract that is essential to Asteron, or which substantially alters the benefits and burdens of the contract (s 37(2)(b)). The duty of good faith can be seen to be an implied term of the contract.16 An obligation to be truthful in making claims under the Policy may be an alternative formulation of the term implied into the contract. Moreover, almost by definition in this type of contract, the performance of a term of this kind is essential to the other party. For these reasons if Mr Taylor breached his obligation by making dishonest statements in his claim forms, this would involve a breach of the term of the insurance contract entitling Asteron to cancel.

[73]              Asteron’s case in this respect focused on what Mr Taylor said in his claim form, and the subsequent reports in terms of whether he was doing any work. There is another question about what Mr Taylor said in these documents about whether he was earning any income, although Ms Meechan was content to advance Asteron’s case based on what was said about working. As I will address in greater detail below, however, I see the two questions as inextricably inter-linked.

The representations about work

[74]              Mr Taylor’s original claim form is dated 19 July 2010. In response to the question “When did you stop all work?” Mr Taylor has originally written in dates in April 2010. He has then overwritten those dates with the date of 23 December 2009. This corresponds to the accompanying part of the report completed by his GP in which she states that she advised Mr Taylor to stop all work on 23 December 2009.

[75]              In response to the question “Have you worked at all since you first consulted your doctor?” he has ticked the box for “yes”. In response to the form asking for details if the answer is yes, he has indicated the date of 12 July 2010, circled the words “part-time”, and stated that he worked 3–5 hours, half days only, that he is working as much as possible, he has been off work again since radiation treatment, but that he planned to return to 3–5 hour days.

16     See footnote 13 above.

[76]              There is further information provided elsewhere in the form. He has indicated in one part of the form that he has not worked from home and that all work was done from the office, that he had normally worked 55–65 hours per week prior to his sickness, and that he has done 20–30 per cent of his week doing keyboard IT input.

[77]              Some of this information is not accurate, but I am not prepared to conclude that this form involves false statements supporting a finding of breach of Mr Taylor’s obligations. There is considerable lack of clarity about precisely what Mr Taylor is saying in the form overall. He has indicated that he has been working part-time and that he intends working more fully. I am not satisfied there is any clearly incorrect (let alone deliberately incorrect) information, such that there was a breach of the obligation implied into the contract. Ms Meechan emphasised that he has represented that he had only returned to work on 12 July. But when describing when he stopped working a number of dates have been initially written in, and then changed or overwritten. Although he has indicated that he only returned to work in July (at the same time as filling in the form) I am not sure that it is as simple as that when all the answers in the form overall are considered.  There is also no clear representation in the form that  Mr Taylor is not making any money from his broking business.

[78]              The position changes with the subsequent progress reports, however. In particular:

(a)In the report covering the period between 23 July and 22 August 2010 completed on 11 August, in response to the question “Have you returned to any work (paid or unpaid, including voluntary work)?”  Mr Taylor has ticked the box “no”. In response to the question “How many hours are you working per week?” he has written “none and not intending to until at least mid-September 2009 [sic] depending outcome oncology report, radiation treatment outcome and success”. In response to the entry for “Gross income earned since you returned to work: (please attach a profit and loss statement for the assessable period)” he has written “none”. Then in response to “If you have not returned to work, when are you anticipating returning to work?” he has

written “Anticipated restricted return mid-September 2010 if able (who knows…) K?”.

(b)The September 2010 report indicates he has not returned to work, says in response to the number of hours working “n/a”, indicates he has had no income and in terms of when he is anticipating returning to work states “unsure now ex increased pain await outcome 02/11 referrals specialist (orthopaedic and palliative) to be advised”.

(c)In his October 2010 report Mr Taylor reports he has returned to work on 29 September and lists a limited type of activity such as sitting in on three client meetings, sitting at his desk corresponding on one or two items a day, and issues of that kind. Then he states:

Return to work undertaken despite medical advice. Was undertaken to gauge/measure my ability to return and in order to meet a “ mental” milestone set some time ago of a return to work by Sept. Any future return to work will be undertaken via full instruction medical advice incl regime to be followed on return.

He also says that he has had no gross income since returning to work.

(d)The November 2010 report states that his treatment now involves “pain medication ex palliative care recommends”, that he has not returned to work and that “no intention of any return to work until New Year and if so under strict guidance/monitoring med advisors”, and that there is no income since his return to work.

(e)The January 2011 report states that he has not returned to work, that he is “not anticipating a return to work at this juncture but intend getting back into work when able to overcome pain issues”, that he is not working any hours per week and he is not earning any income.

(f)The February 2011 report states that he did return to work on 2 and 4 February, that “meetings sat in on both days total time in office 1.5–2 hours per day with staff” and that he was then hospitalised the following

day. He states that he is not working any hours per week and earned no income.

(g)The March 2011 report reports he returned to work on 9 and 11 March totalling 2–3 hours and that he had earned no income.

(h)The April 2011 report states that he returned to work on 4 April (amended to 7 April) that he did an interview with the Otago Daily Times, and sat in to two weekly staff meetings of 30–40 minutes. He states that he is not working any hours per week and that he made no income.

[79]              The reports then change to cover three month periods.    They involve the following representations:

(a)The July 2011 report for April–July states he has not returned to work, that he receives mail and the occasional phone call and that “this activity amounts to 2–3 hours max per week (saves me going round the bend)” and that he has earned no income.

(b)The October 2011 report for July–October states that he has not returned to work, that there are no hours per week that he is working, and that he has received no income.

(c)The January 2012 report for December 2011 to January 2012 says that he has not returned to work, that he has received no income, and in the response to the question how many hours he is working Mr Taylor states “none and will not until condition symptoms improve/diminish to point normal function results”.

(d)The April 2012 report for January–April states that he has not returned to work, but Mr Taylor says “but per previously advised undertake occasional email or telephone interface with office and call into office 1–2 times week to uplift mail (and show my face)” and that “all above

would amount to 2–3 hours a week max”. He also states that he has received no income.

(e)The July 2012 report for April–July states he has not returned to work, that he has received no income from work since returning to work, and in response to the number of hours question states “3–5 via email and Telephone from home with General Manager at office although Email has ceased due to discomfort and exacerbating pain”.

(f)The October 2012 report for July–October reports some details of interaction with staff and associated with returning to work, and in response to the question in terms of how many hours per week this is states “including above less than two hours if that”. He also says that he is earning no income.

[80]              Mr Taylor then moved to six monthly reporting. They involve the following representations:

(a)The April 2013 report for October 2012 to April 2013 states that he has not returned to work, although he describes certain activities such as calling in to the office, and in response to how many hours per week states “6–8 if that Advisory and mail collection”. He states he has received no income.

(b)The October 2013 report for April–October says he has not returned to work, states in relation to number of hours “n/a” and in terms of gross income again says “n/a”.

(c)The April 2014 report for October 2013 to April 2014 ticks the box “no” for returning to work, but states that he does drop into the office occasionally, and states “none” to both of the questions concerning the number of hours worked and income since returning to work.

[81]              Given the findings I have already made earlier in this judgment,17 it is clear that what Mr Taylor was saying in the forms is false. Whatever the impact his conditions had had upon him, he returned to work in 2010 working approximately four hours per day at home or in the office, and generally overseeing the overall business operation. He also engaged in other activities associated with other business ventures.

[82]              I found Mr Taylor’s evidence suggesting otherwise to be unreliable, and at times untruthful. I am very conscious of the need to avoid making findings that a person has acted dishonestly, and that clear evidence must be provided before reaching that conclusion. But I do not see how Mr Taylor’s inaccurate statements about his work could have been the consequence of error. I find that they deliberately misrepresented the amount of work he was engaged in and amounted to a breach of Mr Taylor’s duties under the contract.

Statements about income

[83]              As indicated, Ms Meechan based Asteron’s claim of a breach of the obligations under the Policy on the representations made by Mr Taylor on the number of hours that he worked, and did not place reliance on the statements he made about his income. But it seems to me that these two matters are inextricably interlinked as they are associated with the representations Mr Taylor made in his progress reports that any “work” being performed was incidental, and not meaningful. As I have already found, not only was Mr Taylor still continuing to be involved in his business in largely the way that he was prior to his illness, albeit with reduced hours, it is also apparent that his income remained essentially unaffected, as well as being beyond that which was agreed in the Policy to be insured. Under the Policy he was not entitled to any payment from Asteron because his work continued to provide him amounts beyond the insured level. His representations about not working are clearly associated with this.

[84]              Before dealing with the evidence about the income in question there is a preliminary issue. In the October 2010 report referred to above, in response to the question “Gross income earned since you returned to work” Mr Taylor has written “None taken as at 18.10.10 and unlikely to be paid x Resolution. NB Directors

17     At [40]–[48].

Resolution (copy forwarded — refer docs) dated 2000 directs no compensation payable any director if work less than 30 hrs week”. Such a resolution was forwarded by Mr Taylor. It is a purported resolution of Peter J Taylor and Associates Ltd. It states:

RESOLUTION: THAT IN THE EVENT OF A DISABILITY SUFFERED AS A CONSEQUENCE OF A SICKNESS OR ACCIDENT THAT NO DIRECTOR/SHAREHOLDER WILL BE ENTITLED TO REMUNERATION OR DISTRIBUTION OF PROFITS FROM THE 30TH DAY OF SUFFERING SUCH ACCIDENT OR SICKNESS. FURTHER THAT NO DIRECTOR OR SHAREHOLDER SHALL BE ENTITLED TO ANY DISTRIBUTION OF RPOFIT UNTIL THEY RESUME IN FULL THEIR DUTIES.

[85]              It is signed by both Mr Taylor and his wife in capacity as directors (and his wife in the capacity as company secretary). It is hand dated 16 June 2000. The words at the top say, “This resolution still stands”.

[86]              It was put to Mr Taylor in cross-examination that the document was provided to create the impression that he was not going to get any income because of the bar that the resolution created. Mr Taylor’s response was the document that was provided “to provide a record of fact that had been resolved back in 2000”. I do not accept his evidence. As I have already concluded, this company was not in any way engaged in trade. It was simply a vehicle for passing through commissions. The business itself was conducted by Mr Taylor on a self-employed basis. The resolution is accordingly inexplicable. The document can only have been provided to Asteron to try and give the impression that Mr Taylor was not receiving income when engaged in the limited tasks he described in the forms.

[87]              There is another more serious issue relating to the income Mr Taylor earned. The plaintiff discovered financial statements for the business for the 2010, 2011 and 2012 financial years signed by his accountants when pressed to do so by the defendant during these proceedings. They suggested that he had made significant losses over the years he said he had been incapacitated by his illness, namely an operating loss of

$75,301 in the 2010 year, an operating loss of $38,607 in the 2011 year and an operating loss of $70,881 in the 2012 year. When these accounts were analysed by the defendant’s accounting expert, Mr Shane Hussey, they did not make sense to him. For

example, the 2010 accounts reported the previous year’s results by way of comparison in the usual way, and recorded that there had been an operating loss of $56,472 in 2009. Yet the accounts for the 2009 year reported a different result — an operating profit of $178,134. The two years annual accounts, literally, did not add up.

[88]              A second set of signed accounts were then discovered by the plaintiff. The results in the second set were very different. They reported an operating profit of

$149,025 in the 2010 year, an operating profit of $163,830 in the 2011 year and an operating profit of $155,407 in the 2012 year. Accounts were also provided for the following two years at this time showing an operating profit of $150,561 in 2013, and

$166,013 in 2014.

[89]              The plaintiff provided an explanation for the existence of the first set of financial accounts. The explanation came from Mr Kenneth Rewcastle, a director of PKF Bredin McCormack Rewcastle Ltd (formerly Keogh McCormack) the chartered accountants who had signed off all the accounts for Mr Taylor’s business that had been discovered. He gave evidence that on checking, he had found out that the 2010–2012 accounts first provided were “incomplete draft sets of accounts that differed from what was finalised and returned to the Inland Revenue Department” and that the “error occurred when the financial statements were retrieved from the scanned archive, with the incorrect iteration of the financial statements being provided”.

[90]              Under cross-examination the differences between the two sets of accounts were explored. Mr Rewcastle ultimately accepted that it was hard to see how the inaccurate set of accounts had been a draft set, and he was at a loss to explain some of the differences between the two sets of accounts. He also confirmed that he had not been involved in the preparation of the accounts for this period and had been provided with the explanation that they were a draft iteration by somebody else.

[91]              It is quite clear that the earlier inaccurate set of accounts were not an earlier draft iteration. Rather the finalised accounts had subsequently been changed to create a second set of accounts which incorrectly represented that the business had made losses over the years rather than profits. That is demonstrated by the following features:

(a)Both versions of the accounts are signed by Keogh McCormack. The two versions also bear the same date. So there are two sets of finalised accounts bearing the same date signed by chartered accountants. By itself this demonstrates that the inaccurate accounts showing a loss are not a draft or earlier iteration.

(b)In order to show a loss rather than a profit the accurate accounts have been altered in a particular way to take out significant revenue. In the accurate accounts revenue from two sources is recorded — “F&G commissions”18 and “life commissions”.19 In the inaccurate accounts all the “life commissions” revenue has been excluded, and the revenue line is renamed “sales and renewals”. So in the 2010 year life commission revenue of $224,326 is removed from the accounts, in the 2011 year $202,437 is removed, and in the 2012 year $226,288 is removed. This involves an alteration to the accounts by taking out a significant line of revenue, and a renaming of revenue in a manner that obscures the change. This is not a draft or iteration issue. It is a removal of a substantial part of the revenue of the business from the accounts to create a second false version of the accounts.

(c)The person who has created the false version by removing this income, and renaming the line, has not carried through the exercise in relation to all elements of the accounts. As Mr Hussey said, the accurate operating profit figure is used in the capital statement, even in the inaccurate accounts. So the capital statement in the inaccurate 2010 accounts records a net profit of $95,288, rather than the operating loss recorded in the statement of financial performance. That is true for 2011 and 2012 as well. This demonstrates that the false set of accounts must have been prepared after the accurate set of accounts (or at least simultaneously with the accurate accounts). Whoever it was who has prepared the second false set of accounts did not carry through the changes through all required elements in those accounts.

18     Fire and general insurance commissions.

19     Life insurance commissions.

(d)The same changes have been made in the financial statements for three successive years — 2010, 2011 and 2012. The idea that there is the same issue in a set of draft accounts for each year stored in the accountants’ archive, then provided by way of discovery, is untenable.

[92]              I have little hesitation in finding that these inaccurate accounts have been deliberately created by somebody to create the false impression that Mr Taylor made operating losses, when he in fact made operating profits.

[93]              It was the implications of features of the kind referred to above that dawned on Mr Rewcastle when he was questioned. He appeared genuinely taken aback when the points were put to him. I do not believe he was involved in creating what I find to be a false set of accounts. I am somewhat surprised, however, that a professional accountant would be prepared to give evidence in the High Court providing an innocent explanation for the inaccurate accounts apparently signed off and provided by his firm without thoroughly checking the position. The points put to him in questioning were apparent from the two versions of the accounts themselves, and were also outlined in Mr Hussey’s brief of evidence which he knew of in advance of giving his own evidence.

[94]              It was not put to Mr Taylor in cross-examination that he had been involved in preparing the false set of accounts. Given s 92 of the Evidence Act 2006, it would have been necessary to directly put to Mr Taylor that proposition before it would be appropriate for the Court to reach any conclusion that he had any personal involvement in the preparation of the false accounting material. Accordingly I do not do so. I am simply not in a position to know who it was that created these false accounts. It is also appropriate for me to record that there is no suggestion, of course, that counsel for Mr Taylor, who has had carriage of the proceeding on his behalf, has had any involvement in the preparation of the false material, or the use of it knowing it was falsely created.

[95]              Putting to one side any issue emerging from the creation and provision of the false set of accounts, the accurate accounts demonstrate that Mr Taylor earned income from his business which, on the application of the formula required under the Policy,

resulted in a rebate removing any entitlement for him to receive any payment. That has relevance particularly to Asteron’s claims for restitution of the amounts being paid out to Mr Taylor, which I turn to next.

Remedy – restitution

[96]              As indicated above, the defendant based its case that the plaintiff had breached his obligation of good faith on the misrepresentations about the amount of time he had spent working. Its allegations did  not  extend  to  the  false  representations  about Mr Taylor’s income, although I see the issues as closely related. Nevertheless I have found that Mr Taylor breached his obligations for the reasons Asteron advanced.

[97]              Asteron seeks an order requiring Mr Taylor to pay back to it all the money it has paid him under the Policy given that the payments were induced by the false claims. Once again the provisions of the Act apply to such a claim. Section 43 provides:

43     Power of court to grant relief

(1)When a contract is cancelled by any party, the court may, if it is just and practicable to do so, make an order or orders granting relief under this section.

(2)The relief may be granted in the course of any proceeding or on application made for the purpose.

(3)An order under this section may—

(a)      direct a party to pay to any other party the sum that the court thinks just (subject to section 35):

(b)      direct a party to do or refrain from doing, in relation to any other party, any act or thing that the court thinks just:

(c)      vest the whole or any part of any relevant property in a party:

(d)      direct a party to transfer or assign the whole or any part of any relevant property to any other party:

(e)      direct a party to deliver the whole or any part of the possession of any relevant property to any other party.

(4)In subsection (3),—

party means a party to the proceeding

relevant property means real or personal property that was the subject of the contract or was the whole or part of the consideration for the contract.

[98]              In addition s 49 allows a party to claim damages even if it has cancelled the contract, although any relief granted under s 43 needs to be taken into account in the damages award.

Was the contract cancelled?

[99]              A technical issue emerged on the application of s 43. Had Asteron actually cancelled the contract? Section 41(1)(a) of the Act requires that the cancellation be “made known to the other party” although it is not necessary to use any particular form of words, so long as the intention to cancel is made known (s 41(2)). When Asteron wrote to Mr Taylor saying it was making no more payments under the contract by email dated 3 September 2014, it did not say it was cancelling the contract. No subsequent communication directly to Mr Taylor did so either.

[100]           In Asteron’s first amended statement  of  defence  and  counter-claim  dated 11 April 2016, Asteron pleaded the breach of the obligation of utmost good faith which it said “entitles the defendant to cancel the policy”. That pleading was served, but that may not have amounted to notice of cancellation. It is possible to read that statement as saying no more than it was entitled to cancel. There was no clear communication of actual cancellation in accordance with s 41.

[101]           That ambiguity seems to me to have been removed when Asteron served the brief of evidence  of  Andrew  James  Sjogren  Strong  dated  22 November  2018. Mr Strong is a solicitor with the Suncorp Group which owns Asteron, and was the in- house solicitor dealing with Mr Taylor’s claim. In his brief of evidence he said that the position of Asteron was that it had cancelled the Policy and was seeking repayment. Whilst Mr Strong technically may not have authority to convey Asteron’s position, I am satisfied the service of this brief of evidence by Asteron’s solicitors amounted to notice of cancellation by Asteron within the meaning of s 41.

[102]           In any event the technical argument on the effectiveness of cancellation may not make much difference. If Asteron had not cancelled the Policy, and is accordingly

not able to apply s 43, it is nevertheless still able to seek damages for breach of contract as contemplated by s 49. As I have held, a breach of the implied terms of the contract by making false claims is a breach of contract. On a normal contractual analysis, Asteron is entitled to be put in the position had the contract been performed. Had it been performed, it would not have paid out the money it did to Mr Taylor. Its loss, and its claim for breach of contract, is equivalent to the amounts it seeks by way of restitution.20

[103]           Given my findings, however, I proceed by applying s 42. This section allows the Court to make orders that have the effect of unwinding contractual obligations that have already been performed if that is just and practicable.

What should be restituted?

[104]           Ms Meechan was able to refer to a number of authorities where the Courts have held, as a matter of common law, that the insured is not entitled to any benefit under an insurance contract where they have made a claim in bad faith. The approach of the common law is to allow the insurer to deny making any payment out, and to recover anything that it has paid out, even when there may be some legitimate elements of the insurance claim. The fraud obviates the entitlement in its entirety. As it was put by Sir Roger Parker in Orakpo v Barclays Insurance Services Co Ltd:21

On what basis can an assured who asserts, for example, that he has been robbed of five fur coats and some valuable silver, when he has only been robbed of one fur and no silver, be allowed, when found out, to say, ‘You must still pay me for the one of which I was truly robbed’?; I can see none, and every reason why he should not recover at all. Just as on inception the insurer has to a large extent to rely on what the assured tells him, so also is it so when a claim is made. In both cases there is therefore an incentive to honesty, if the assured knows that, if he is fraudulent, at least to a substantial extent, he will recover nothing, even if his claim is in part good. In my view, the law so provides.

[105]           That principle applies not simply so that the insurer can resist a claim for entitlement, but also allows the insurer to recover all amounts paid to the insured by a

20 On the basis of the authorities relied upon by Asteron, referred to at [104]–[105] below that right would include all amounts paid out, even if they were legitimately claimed in part.

21     Orakpo v Barclays Insurance Services Co Ltd [1994] CLC 373 (CA) at 384–385.

claim for restitution.22 The principle has recently been approved by the United Kingdom Supreme Court, albeit the Court also recognised an exception for so-called “collateral lies” where the lies are not relevant to the entitlement.23

[106]           Such concepts are equally applicable to deciding what is “just and practicable” on the application of s 43. They are only truly relevant to the present case because Asteron has been content to advance its claim for restitution based on Mr Taylor’s misrepresentations about the extent to which he was working irrespective of the question of Mr Taylor’s income, and whether or not the level of that income eliminated any entitlement by virtue of the rebate. Asteron advanced its claim on the basis it was entitled to restitution irrespective of whether Mr Taylor had any valid entitlement under the Policy, arguing that Mr Taylor’s misrepresentations were not collateral to the entitlement.

[107]           For the reasons I have found, however, the position is that Mr Taylor never had any entitlement under the Policy. That makes the position concerning restitution more straightforward. Nevertheless had the position been that Mr Taylor’s income levels had entitled him to a partial payment under the Policy, I would have seen considerable force in Ms Meechan’s argument that he should be deprived of it as a consequence of the dishonest claims, exercising the discretion under s 43.

[108]           Mr Taylor advances a defence to the restitution claim, however. In his amended reply to the first amended statement of defence and counterclaim three defences are pleaded: immateriality; absence of intent; and change of position. I have already, as a matter of substance, dealt with immateriality and absence of intent. The misstatements made by Mr Taylor were plainly material, and I find that they were deliberately false. But I need to address the change of position defence, which was also focused on by Mr Beck.

22     AXA General Insurance Ltd v Gottlieb [2005] EWCA Civ 112, [2005] 1 All ER Comm 445.

23     Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2016] UKSC 45, [2017] AC 1 at [26].

Change of position

[109]           Mr Taylor pleads that he received the insurance payments in good faith, that he has altered his position in reliance on the validity of the payments, and that it is inequitable to grant relief as sought by Asteron. Once again this defence, which is recognised at common law, has been addressed by the Act. It provides:

47     Party who has altered position

(1)No order may be made under section 43 in respect of any property if any party to the contract has so altered the party’s position in relation to the property that, having regard to all relevant circumstances, it would, in the opinion of the court, be inequitable to any party to make the order.

(2)This section applies whether the party altered the party’s position before or after the cancellation of the contract.

[110]           It seems to me that there is an immediate answer to Mr Taylor’s defence in this respect. At common law, and as his pleading recognises, to be able to rely on this defence it is necessary for Mr Taylor to be acting in good faith.24 Given that s 47 is based on what is inequitable, the requirement seems to me to equally apply to the application of that section. For the reasons I have already found, Mr Taylor has not acted in good faith. He induced Asteron to pay him money under the Policy by making false statements in relation to the extent that he was working. That is so even if I do not take into account the further and related misrepresentations made about income. A person who has dishonesty induced another to make a payment cannot claim it is inequitable to require repayment because he or she has changed position in reliance on the fruits of the dishonesty.

[111]           Accordingly I do not need to deal with all of the other submissions made by the parties on change of position in any detail. I will, however, briefly address some of the factual matters raised by Mr Taylor, in part because they also demonstrate why his position is untenable.

24 See National Bank of New Zealand Ltd v Waitaki International Processing (NI)  Ltd  [1999] 2 NZLR 211 (CA) at 219, 227–228, 232–233; OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778 (CA) at [52]; and Karl v Accident Compensation Corporation [2005] NZAR 97 (HC) at [56].

[112]           Three areas of expenditure were raised by Mr Taylor in purported reliance on Asteron’s payments under the Policy, namely:

(a)expenditure on building a holiday house at Karitane;

(b)expenditure on the purchase of two motor vehicles; and

(c)expenditure on overseas trips.

[113]           Even putting to one side all the other issues, the evidence demonstrated a lack of factual foundation for a defence based on such expenditure. There was a lack of any detailed evidence — for example evidence of Mr Taylor’s overall income and expenditure over the years. Rather, Mr Taylor just asserted in his briefs of evidence the expenditure was incurred in reliance on the insurance income.

[114]I will deal with each category of expenditure in turn.

Karitane house

[115]First Mr Taylor gave evidence the building of the house cost him well over

$700,000 and that if he had not had the security of income from the Policy he would not have undertaken the project. He said that it had become unrealistic for him to travel to Wanaka on a regular basis because of his illness, and that he chose Karitane because he thought being on the coast would assist in his rehabilitation. He also said that when the benefits under the Policy ceased “it hit hard” and that they were “in the midst of a build at Karitane and the withdrawal of funds that I had come to anticipate would be there was a real blow given I never for a moment believed that my insurer would play fast and loose with my Income Policy and its benefits”.

[116]           I do not accept this evidence. Under cross-examination it was put to Mr Taylor that the house build had finished in 2012, so that his evidence that the cessation of payments in 2014 had been a real blow as they were in the middle of that build could not be true. His response that the house had been completed, but the landscaping and fitout had not been. I do not accept this explanation. I also do not accept his evidence that it was no longer realistic for him to travel to Wanaka on a regular basis after the

suggested incapacitation. The evidence demonstrated that he continued to do so during this period. Moreover given the continued levels of income from his business, I see no basis to accept his contention that the Karitane house was built because of the insurance payments. I find his evidence as a whole unreliable.

The motor vehicles

[117]           Mr Taylor also contended that he had purchased two motor vehicles, and that he would have “done things differently” if he had not had his income from the Policy. He put the position no higher than that.

[118]           These were expensive vehicles. A new 2010 Mercedes Benz SL400 Coupe costing $185,534.24, and a used 2012 Mercedes Benz C63 Coupe costing

$194,157.70.

[119]           Again I found Mr Taylor’s evidence on these matters unreliable. Any suggestion that he only purchased vehicles costing this much because of insurance payments of approximately $6,000 a month is difficult to accept. When asked he explained he presently had a Maserati Quattroporte, and that it had been purchased after the sale of the Mercedes in 2017. He said that the Maserati had cost approximately $170,000. He was initially reluctant to answer any questions about it, explaining that it was owned by a trust and not by him or his wife. In answer to questions from me he accepted that he was a beneficiary of the trust that owned the vehicle. It was parked in their garage. The Maserati was purchased after Asteron ceased making its payment under the Policy, so it is difficult to accept that such vehicle purchases only took place because of the insurance revenue. No persuasive evidence was provided by Mr Taylor explaining why the decision to purchase the two Mercedes was attributable to the income stream from the insurance.

Overseas travel

[120]           Finally Mr Taylor raised the cost of overseas travel. He put it in the following way:

Rhona and I made several overseas trips that we would not have undertaken had we not been receiving payments from Asteron. Overseas travel was

regarded as beneficial for my health as it enabled me to spend cold months in warmer places.

[121]           The most expensive items involve airfares to the Pacific Islands, particularly Hawaii and Fiji. During cross-examination it was established that some of this travel had actually been business expenditure, and some of it had actually been cancelled. Moreover the suggestion that he travelled to Hawaii, which takes some 12 hours, is difficult to reconcile with his evidence that he suffered from extreme back pain inhibiting his ability to remain seated for work activities.

[122]           But in terms of the contention that he only engaged in this overseas travel because of the Asteron payment, I am again not satisfied by Mr Taylor’s assertions alone that this is true. More compelling evidence would be provided for me to accept this.

Conclusion on change of position

[123]           For these reasons I reject Mr Taylor’s defence of change of position. Primarily that is because he has not acted in good faith. He is not able to resist repayment of money he has dishonestly secured because he says he has spent money on a holiday house, two luxury cars, and holidays to the Pacific. For that reason the defence is not available. Even apart from that point, however, the evidence he provided does not satisfy me that he incurred this expenditure in reliance upon the payments by Asteron.

CONCLUSION

[124]           For the above reasons I dismiss the plaintiff’s claim, and I uphold the defendant’s counterclaim.

[125]The first amended statement of defence and counterclaim claims the sum of

$371,286.70. The defendant is entitled to judgment for that amount. Asteron also seeks interest on that amount for such period as the Court deems just. I received no submissions on that interest claim. If interest is awarded from the date the last payment was made for the total balance at that time, Asteron will not obtain benefit of interest in relation to earlier payments. In the circumstances I reserve leave for Asteron to file a memorandum setting out its claim for interest, which can be responded to by

a memorandum from the plaintiff. The period of time for doing so is to correspond with the timetable for filing of memoranda in relation to costs set out below.

[126]           The defendant is entitled to costs for resisting the plaintiff’s claim, and on its counterclaim, which is to be considered in light of the findings in this judgment. The defendant may file a memorandum seeking costs within 10 working days of release of this judgment (no more than 10 pages) with the plaintiff responding within 10 working days (no more than 10 pages). Costs will then be determined on the papers.

Cooke J

Solicitors:

Peter Sara, Dunedin for Plaintiff

Anne Lindsay, Auckland for Defendant