Commercial Transactions

1. Commercial Transactions Module 11 - Insurance Summer Session 2006/07

2. Contracts of Insurance At the conclusion of this module students will be expected to have a good understanding and working knowledge of: • The special characteristics of Contracts of Insurance e.g.…formalities, utmost good faith, regulated by ICA, coverage • Duty of disclosure, problems with misrepresentation (especially ss. 13, 21, 21A, 22,) • Failure to perform duties after contract is made (s. 54) • Consequences of failure in these duties for both insurer and insured (ss.28,60,31) • The Insurers right of subrogation (s.66) • Fraudulent claims (s.56) • Relevant sections of the ICA and relevant cases to support statements of law and interpretation.

3. INSURANCE The Scheme of REGULATION COMMONWEALTH 1. Marine Insurance Act 1909 2. Life Insurance Act 1995 3. Insurance Contracts Act 1984 4. Insurance (Agents and Brokers) Act 1984 NSW Insurance Act 1902 Also: Unfair Contracts Act 1980 General Contract Law Consumer Credit Law Common Law e.g. insurable interest, utmost good faith, misrepresentation, fraud, crimes

4. The Insurance Contracts Act 1984 To what does it apply? See ss. 4,8,9,11. Policies entered into from 1.1.86 It does NOT apply to contracts • For reinsurance • Health insurance • To which a friendly society is a party • To which Export Finance and Insurance Corporation is a party • Governed by Marine Insurance Act • For workers compensation • For compulsory third party insurance • Policies underwritten jointly by an insurer, and state or NT . • Concerning aircraft engaged in commercial operations with insurance covering war risks Act meant to codify law. Common law and equity still apply unless expressly or impliedly excluded. S. 7

5. INSURANCE CONTRACT ACT LONG TITLE An Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly, and for related purposes.

6. What is a contract of Insurance? For prudential reasons, Insurers are required to be licensed and to maintain certain requirements as to capital and the like. As the collapse of HIH showed, significant problems for the rest of the economy flow if insurers are unsound or engage in unsatisfactory practices leaving insureds without cover.A current (2006) discussion on the same issue concerns foreign based insurers doing business in Australia; while not being subject to our prudential regulation. We should therefore be clear as to what a contract of Insurance is, so that we may properly advise clients who develop financial products, and the application of other Codes and legislation.e.g. electronic transactions Act.

7. INSURANCE A contract of INSURANCE is a contract by which one party, the INSURER, in consideration of a sum of money called the PREMIUM, undertakes to pay to another person called the INSURED, a sum of money or its equivalent on the happening of a specified uncertain EVENT.

8. MEDICAL DEFENCE UNION V. DEPARTMENT OF TRADE (1980) 1 Ch 82 Facts • Medical Defence Union Ltd had 80,000 members; dentists, doctors. • Each member had contractual right to require union to consider properly a request for assistance in relation to a claim made against a member. • As a result of consideration, union might indemnify member. • Department of Trade alleged this meant union was entering contracts of insurance and subject to Insurance Companies Act 1974. • Union denied allegation and sought declaration in HC.

9. MEDICAL DEFENCE UNION V. DEPARTMENT OF TRADE (1980) 1 Ch 82 Decision Sir Robert Megarry VC 1. Drew on 3 elements necessary in a contract of insurance as per Prudential Insurance Co. v. Inland Revenue Commissioners (1904)2 KB 658 as read in light of Gould v. Curtis (19113) 3KB84 --- • Contract provides assured will become entitled to something on the occurrence of some event. What Is “Something”? …Some Benefit…or Money Or Money’s Worth? • The event must be one which involves some element uncertainty • Assured must have insurable interest (old case) 2. Did not aspire to comprehensive definition, but saw nothing in authorities to support very wide and extensive generalisation such as “benefit”. Insurance implied contracting for something certain; not relying on a request for a discretion to be exercised in his favour. Surrounding facts did not support it either. No variance of fees in line with frequency claims. Wide services and general nature of business of union far removed from general nature of those generally accepted as insurers.

10. INSURANCEMedia and Information Releases 03-044 ASICFriday 7 February 2003 (ASIC) obtained orders in the Federal Court against Barclay MIS Landlord Protection Plan (VIC) Pty Ltd, and seven related companies, which operate out of each Australian state and territory (collectively referred to as the Barclay group).Both ASIC and APRA made claims against the Barclay group in the proceedings. ASIC took this action after forming the view that the 'landlord protection' products sold by the Barclay group to between 120,000 and 150,000 landlords throughout Australia, were contracts of insurance. The landlord protection products provided a range of different benefits, including reimbursement for lost rent, and payments for property damage. Under the Financial Services Reform Act, which came into effect on 11 March 2002, it was unlawful to issue insurance products without holding an Australian Financial Services Licence (AFSL), issued by ASIC, or without authorisation to act as an insurer from the Australian Prudential Regulatory Authority (APRA). No entity within the Barclay group was authorised to act as an insurer, or held an AFSL.

11. INSURANCEMedia and Information Releases 03-044 ASICFriday 7 February 2003 Cont. The Court also declared that since 11 March 2002, each entity in the Barclay group ha been carrying on a financial services business without an AFSL. Mr David Banks, a director, undertook to the Court that he would not offer any of the above products for sale, other than the Barclay Basic product. During the proceedings, the Barclay group advised the Court that they proposed to commence selling two new products, known as the Basic Assistance Plan and the Total Assistance Plan. The Court ruled that although these products are not contracts of insurance, they were financial products and, as such, the Barclay group was required to hold an AFSL in order to offer these products for sale. Mr Banks also undertook to the Court that the Barclay Group will not offer these products for sale without first applying for, and obtaining an AFSL. The Barclay group is not in any way related to Barclays Bank.

12. Rights of third parties Many examples Householders policy which covers family members, a credit provider Disability cover or income replacement cover issued for the benefit of a member of a superannuation fund. Public liability cover extended to cover a principal Contract works cover extended to cover a sub contractor Credit car covers effected by a bank for the benefit of cardholders Some disadvantages for third parties: They may never see policy schedule and wording Reliant on contracting parties for those things A non-contracting party, so usually excluded from negotiations

13. Third party Rights to the benefit of a contract of insurance Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd (1988) 165 CLR 107 the HC recognised a common law “insurance” exception to privity of contract around the time of the commencement of the ICA and the enactment of s. 48. S. 48 makes it the general rule for insurance contracts. As both the common law and Insurance law develops, it is possible that the third party’s position may be better under one or the other and so both should be analysed in any particular case.

14. Insurance Contracts Act s. 48 • (1)“Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether byname or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of his loss from the insurer in accordance with the contract notwithstanding that he is not a party to the contract. • (2) Subject to the contract, a person who has such a right- • (a) has, in relation to his claim, the same obligations to the insurer as he would have if he were the insured; and • (b) may discharge the insured’s obligations in relation to the loss. • (3) The insurer has the same defences to an action under this section as he would have in an action by the insured”

15. Insurer Rights to the benefit of a defence against the insured s. 48(3) Interpretation of 48(3) has depended, to an extent, on the nature of the conduct alleged against the insured.Where an insurer would have been able to rely on a defence of non-disclosure in a claim brought by the insured, the insurer can also rely on that non-disclosure against a third party.See Baltica. On the other hand, where fraud by the insured has been involved, it has been held that the third party beneficiary has not been tainted with the conduct of the insured.

16. COMMONWEALTH BANK OF AUSTRALIA V. BALTICA GENERAL INSURANCE CO (1992) 28 NSWLR 579 The facts • Baltica insured a building against fire • Insured were owners • Policy stated it extended to Commonwealth as Mortgagee • Building damaged by fire. • Bank claimed indemnity, was refused, sued. • Baltica relied on non-disclosure by insured as defence to claim under s. 48 ICA

17. COMMONWEALTH BANK OF AUSTRALIA V. BALTICA GENERAL INSURANCE CO (1992) 28 NSWLR 579- The decision Giles J. • s. 48 enacted to overcome problems re third parties; especially situation where loss of third party not loss of insured and third party not a party to the contract. • The section means what it says. Baltica defence stands.

18. INSURANCE The former common law requirement for an insurable interest Some legal or equitable interest in subject matter of insurance To distinguish from gambling and to avoid moral hazard Requirement was sometimes quite harsh in the outcome: Macaura Shareholder and unsecured creditor held to have no insurable interest. Truran MD wanted his company to buy a bulldozer and made loose arrangement. Found only to have only “confident expectation” that a purchase would occur. No right he could enforce and therefore no insurable interest. • See the position under ss. 16,17,18 Insurance Contracts Act Relevance of common law is in interpretation of use of expression, relevance of changes to law and in areas outside general insurance. Note that with some insurances, one must still have an insurable interest. Under Marine Insurance Act it is a gaming contract if no insurable interest.

19. MACAURA V. NORTHERN ASSURANCE CO (1925) AC 619 1. M sold all the timber on his estate to Irish Canadian Saw Mills Ltd. 2. In return he received all company shares. 3. Within 8 months, company had cut down and sawn up all timber. 4. 6 months later M took out fire insurance over the timber with NA 5. Fire destroyed almost all timber soon afterwards. 6. M claimed indemnity. Refused. He sued and appealed all the way to H of L. Lord Buckmaster • True that timber owned by the company, but practically the whole interest in company owned by appellant and facts suggested only person interested in preservation of timber. • But no insurable interest as creditor or as shareholder.

20. TRURAN EARTHMOVERS V. NORWICH UNION FIRE INSURANCE SOCIETY, (1976) 17 SASR 1 Truran and Hamlyn were old friends. Hamlyn had bulldozer Truran wanted to purchase. Both thought it worth $40,000.Truran lent money to Hamlyn from time to time and there was an understanding that price would be reduced by amount loans. Hamlyn wanted to insure bulldozer Truran had it added to existing policy of Mr. T’s Company, Truran Earthmovers P/L. Bulldozer damaged by fire. Truran Earthmovers claimed under policy. Claim knocked back and sued in SCSA. Bright J. • Did Truran Earthmovers have an insurable interest? • Judge felt he should lean towards finding one if he could; but it must be an interest law will recognize or protect on legal or equitable principles. • Although Truran had confident expectation of becoming owner, neither he nor his company ever acquired a right to purchase. • No right of property law would recognise or protect.

21. Duty of utmost good faith Uberrimae fidae At common law, duty on both parties to disclose to each other all matters known to them which are material to the risk. Voidable by aggrieved party. Unenforceable by offending party Duty now codified in Insurance Contracts Act s. 13 Duty of disclosure: See ss. 21, 21A, 22 and 28 1. Insurer must advise of duty. S. 22 2. Insured must tell insurer everything insured knows (common law was an objective test) that will increase their chances of making a claim. 3. Must tell before issue, renewal, extension, variation or reinstatement. Insured does not have to tell anything that: · Reduces chances of a claim s. 21(2) · Everybody knows s. 21(2) · Insurer knows or should know in ordinary course of business s. 21(2) · Insured indicates it does not want to know. Note blank answers might be waiver by insurer s. 21(3) and not necessarily misrepresentation s. 27

22. Duty of good faith, disclosure If insured does not comply; (ss 28-33) Insurer may:-------- • Reduce payment made under policy s. 28(3) to position it would have been in if there was disclosure • Refuse payment • Cancel Policy (ss.59,60) • Treat policy as if it never existed, if fraud involved s. 28(2)

23. INSURANCE CONTRACTS ACTs. 13DUTY OF UTMOST GOOD FAITH A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

24. s. 21 THE INSURED’S DUTY OF DISCLOSURE (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) The insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) A reasonable person in the circumstances could be expected to know to be a matter so relevant. (2) The duty of disclosure does not require the disclosure of a matter: (a) That diminishes the risk; (b) That is of common knowledge (c) That the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or (d) As to which compliance with the duty of disclosure is waived by the insurer. (3) Where a person: (a) Failed to answer; or (b) Gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

25. INSURANCE CONTRACTS ACT 1984SECT 21A (1)This section applies to an eligible contract of insurance unless it is entered into by way of renewal. (2) The insurer is taken to have waived compliance with the duty of disclosure in relation to the contract unless the insurer complies with either subsection (3) or (4). (3)Before the contract is entered into, the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. (4)Before the contract is entered into, both:(a) the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and (b) the insurer expressly requests the insured to disclose each exceptional circumstance that: (i) is known to the insured; and (ii) the insured knows, or a reasonable person in the circumstances could be expected to know, is a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and (iii) is not a matter that the insurer could reasonably be expected to make the subject of a question under paragraph (a); and (iv) is not a matter covered by subsection 21(2).

26. INSURANCE CONTRACTS ACT 1984SECT 21A (5) If: (a) the insurer complies with subsection (3) or (4); and (b) the insurer asks the insured to disclose to the insurer any other matters that would be covered by the duty of disclosure in relation to the contract;the insurer is taken to have waived compliance with the duty of disclosure in relation to those matters. (6) If: (a) the insurer complies with subsection (3); and (b) in answer to each question referred to in subsection (3), the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; the insured is taken to have complied with the duty of disclosure in relation to the contract. (7)If: (a) the insurer complies with subsection (4); and (b) in answer to each question referred to in paragraph (4)(a), the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; and (c) the insured complies with the request referred to in paragraph (4)(b);the insured is taken to have complied with the duty of disclosure in relation to the contract. (8) In any proceedings relating to this section, the onus of proving that a matter is an exceptional circumstance covered by subparagraph (4)(b)(iii) lies on the insurer. (9) In this section: "eligible contract of insurance" means a contract of insurance that is specified in the regulations.

27. INSURANCE CONTRACTS REGULATIONS 1985 Eligible contracts of insurance (Act s 21A (9)) (1) A contract of insurance is an eligible contract of insurance if it: (a) is for new business; and (b) is wholly in a class of contracts that is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies. Note: The following regulations declare certain classes of insurance contracts for Division 1 of Part V of the Act: * regulation 5 (motor vehicle insurance);* regulation 9 (home buildings insurance where insured is a natural person); * regulation 13 (home contents insurance); * regulation 17 (sickness and accident insurance); * regulation 21 (consumer credit insurance); and * regulation 25 (travel insurance) (2) A contract of insurance is an eligible contract of insurance if: (a) it is not mentioned in subregulation (1); and(b) it is for new business; and(c) the insurer, before the contract is entered into, gives to the insured: (i) a written notice in accordance with the form set out in Part 3 of Schedule 1; or (ii) an oral notice in accordance with the words set out in Schedule 2; or(iii) a notice otherwise complying with subsection 22 (1) of the Act clearlyinforming the insured of the general nature and effect of the duty ofdisclosure and the general nature and effect of section 21A of the Act.

28. INSURANCE CONTRACTS REGULATIONS 1985 SCHEDULE 1 Writing to inform insureds of general nature and effect of duty of disclosure (subregulation 3 (1)). Part 1: Contracts of General Insurance Your duty of disclosure: - Before you enter into a contract of general insurance with an insurer, you have a duty, under the Insurance Contracts Act 1984 , to disclose to the insurer every matter that you know, or could reasonably be expected to know, is relevant to the insurer's decision whether to accept the risk of the insurance and, if so, on what terms. You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of general insurance.

29. INSURANCE CONTRACTS REGULATIONS 1985 SCHEDULE 1 Your duty however does not require disclosure of matter: - that diminishes the risk to be undertaken by the insurer; - that is of common knowledge; - that your insurer knows or, in the ordinary course of his business, ought to know; - as to which compliance with your duty is waived by the insurer. Non-disclosure If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce his liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning.

30. INSURANCEDUTY OF DISCLOSURE-example Before you enter into a contract of general insurance with an insurer, you have a duty under the Insurance Contracts Act 1984 to disclose to the insurer every matter that you know, or could reasonably be expected to know, is relevant to the insurer's decision whether to accept the risk of the insurance, and if so, on what terms. You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of general insurance. Your duty however does not require disclosure of matters: - • That diminish the risk to be undertaken by the insurer; • That are of common knowledge; • That your insurer knows or, in the ordinary course of his business, ought to know; • As to which compliance with your duty is waived by the insurer.

31. INSURANCEDUTY OF DISCLOSURE Cont. Examples of information which are relevant to insurers are:- (i) Past claims experience; (ii) A cancellation of a previous insurance policy or refusal by an insurer to renew a policy previously held by you; (iii) Any unusual features of the subject matter of the insurance which might increase the likelihood of a claim under the policy. If you are uncertain about whether or not a particular matter should be disclosed to the insurer, please contact our office. Non-disclosure If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce his liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning.

32. INSURANCEDISCLOSURE Mary is applying for travel insurance for SEAsia. In the personal questionnaire applicants are asked if they have ever had a genetic test. Mary has participated in a screening program for sickle cell disease and the genetic test revealed she was a carrier. Does Mary have a legal duty to answer Yes? Yes, otherwise false and misleading. Does Mary have a legal duty to reveal the result? On current knowledge, No, as carrier status for sickle cell gene actually reduces the risk of developing malaria. Section 21 (2) ICA states that an insured is not required to disclose a matter that diminishes the risk. However, as knowledge changes, it may be relevant to increasing risk and should then be disclosed. The insurer may know more about such things from its data banks than the typical insured. They collect sophisticated statistical data and may one day have access to medical records and genetic screening data.

33. INSURANCEDISCLOSURE Cont. Risks also change. An example of how things change can be seen from HIV. Once considered an imminent death sentence, it is now not so clear with many individuals surviving more than 10 years. Some may not develop AIDS at all. We are not sure any more. We also have to consider the particular insurance applied for. A history of lower back pain may be very relevant to income protection insurance (time off work) but may not be relevant to life insurance if they are not of a type which shortens life. We also need to view things from the point of view of the insurer as well as our own. A house that has been rewired by its inexpert owner rather than a qualified electrician would be a greater risk for an insurer, but perhaps not for the insured.

34. MAYNE NICKLESS V. PEGLER (1974) 1 NSWLR 228 Mr. Klokas bought a car. NRMA issued a cover note for $900. 2 days later Klokas ran into a truck belonging to Mayne Nickless. Klokas died and Pegler was administrator of estate. Mayne Nickless sought declaration that NRMA bound to indemnify Pegler for verdict against him by Pegler re damage to the truck. Klokas had had previous serious accident arising from his own negligence, while a learner, which was not disclosed. Does Duty disclosure apply to cover note? Cover note issued at request of vendor pending completion of formal proposal and issue of policy.Because cover note is contract of insurance, duty of disclosure notwithstanding no formal proposal submitted. Accident not disclosed. Voidable. Avoided. No insurance contract. Was the non-disclosure material? Note this case is pre Insurance Contracts Act .“a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether he will accept the insurance and if so, at what premium and on what conditions.” Material non-disclosure here. No contract of insurance

35. MUTTON V. INSURANCE CORP OF IRELAND (1985) 3 ANZ Insurance Cases 60-630 Mutton insured truck with ICI. Proposal asked about accidents and driving offences. Mr. Mutton economical with disclosure. Proposal further asked re Driver, Watt. Watt also less than forthcoming. Truck stolen from Mutton’s yard. Mutton claimed indemnity but did not get it. Sued ICI Yeldham J. SCNSW • ICI has not sought to rely on incomplete or incorrect statements. (basis of policy, incorporated) Rather non-disclosure made policy voidable and ICI entitled to avoid it. (extends to non-disclosure of material facts which insured should in the ordinary course of business ought to have known) • Statements re Watt grossly inaccurate but not satisfied Mutton knew about his many driving convictions. • Failure to disclose material facts? • Loss by theft in same yard before, non-disclosure convictions for overloading and having defective vehicles entitled insurer to avoid.

36. ADVANCE (NSW) INSURANCE AGENCIES V. MATTHEWS (1989) 166 CLR 606 Matthews was partner in business which suffered fire. Claim made and rejected. 6 years later, he and wife insured home contents. Q4 of proposal: Have you ever had any claim rejected? Q5 : Are there any other facts which should be disclosed? Mr. and Mrs. M answered No to both questions. Within a fortnight home burgled and damaged by fire. Refused indemnity. Insurer sought declaration in SC. Refused. Appealed to CA failed. Appealed to HC. HC. Mason CJ, Dawson, Toohey and Gaudron JJ • Court reviewed long title to Act…clearly meant to codify law and replace common law…referred to ss.21, 24 and 28, 31. • Found reference to insured meant each co-insured. • Questions therefore directed to each co-insured. • Was it fraudulent?….28(2)..if the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

37. Permanent Trustee Australia Limited v. FAI General Insurance Company Limited (inLiq) HCA 25 (8 May 2003) Permanent had professional indemnity insurance for 1 Oct 90 to 30 Sept 91 with Sedgwick as broker. FAI was one excess insurers. In Aug 91, Permanent instructed Sedgwick to begin renewal process. However, by then Sedgwick was concerned about FAI’s financial stability as it had been downgraded by Standard and Poors. It decided not to place with FAI if it could do so elsewhere. On 20 Sept 91, the lead underwriter asked for more information and given short time left for renewal suggested cover be extended 30 days. Sedgwick sought agreement of all insurers, including FAI. No mention was made of Sedgwick’s intention not to renew. FAI agreed to extension. During 30 day extension, Permanent notified circumstances which ultimately lead to a claim for $100m, of which $36m fell to insurers including FAI, who refused to pay.

38. Permanent Trustee Australia Limited v. FAI General Insurance Company Limited (inLiq) HCA 25 (8 May 2003) Cont. First instance judge found as fact that FAI’s underwriter believed it would be invited to quote and it would not have granted extension if it knew Permanent did not intend to invite it to participate. Also found Permanent had breached duty of disclosure under s. 21(1)(a) by failing to inform FAI of intention not to renew. NSW CoA upheld finding and held that employee had misrepresented insured’s position under s. 26(2) by omission and found that the knowledge of the broker was knowledge of Permanent for the purpose of s. 21(1)(a) and therefore Permanent had made a misrepresentation under s. 26(2). HC by majority of 3/2 held Permanent did not breach duty of disclosure and did not misrepresent risk. It distinguished between matters relevant to acceptance of risk and those matters of a commercial nature (this case). Too big a burden on insured because range of commercial considerations that would have to be disclosed “almost boundless” and would defeat purpose of Act to ameliorate pre-existing CL rules on disclosure.

39. Misrepresentation At common law misrepresentation of a material fact in negotiations leading to contract enables insurer to avoid it regardless of whether innocent or fraudulent. Usual problems are with answers to questions or “Basis Clause”-at the end a declaration that insured warrants everything is correct and this forms part of contract. Warranty becomes condition in insurance law See. Dawsons v. Bonin See s. 18 Insurance Act 1902 (NSW) If a failure by insured to observe or perform a term or condition may reasonably be excused because insurer not prejudiced by failure, court may excuse. Does not affect duty disclosure/uberrimae fidei.Prejudice easy to prove for most insurers. See also ss. 26-28 Insurance Contracts Act s.26-certain statements not misstatements s.27-failure to answer questions s.28-remedies for non-disclosure, misrepresentation

40. INSURANCEDAWSONS V. BONNIN, (1922) 2 ac 413 Dawsons insured a lorry with Bonnin. Proposal filled in by broker. Q2 asked for proposer’s address. Broker wrote: 46 Cadogan Street, Glasgow (correct)Q4 asked for address at which lorry would usually be garaged.Broker wrote: “Above address” (incorrect). Too big for Cadogan Street.Signed by secretary and mistake not noticed. Basis clause in policy. Lorry destroyed by fire. Claimed indemnity unsuccessfully. HL Although not a material misstatement, basis clause a separate and independent condition.Mere untruth enough to render contract voidable.

41. PLASTEEL WINDOWS AUSTRALIA V. CE HEATH UNDERWRITING AGENCIES (1990) 19 NSWLR 400 Plasteel suffered loss by fire. When they sued Sun, held there was no valid policy. Sued broker for not having arranged valid policy; succeeded Broker could not pay and so Plasteel sued his professional indemnity insurer, Heath. So did broker. Heath won. Plasteel appealed to CA Samuels JA Did Broker breach duty of disclosure and/or make misrepresentation within Act? If so, what is the appropriate relief? Q11a proposal- Is it the practice of your Firm to sign proposals on behalf of your clients? Answer was No False to appellants knowledge. Judge decided it was a practice at the time. Onus of proving application of s. 26(1) lies on proponent and of s. 26(2) upon insurer. s. 28 applies and could be avoided. Fraudulent. Doubted that Broker had standing to argue s. 31. In any case, insurers had suffered prejudice.

42. INSURANCE CONTRACT ACT s. 28 REMEDIES -NON-DISCLOSURE AND MISREPRESENTATION 1. This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into: (a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into. 2. If the failure was fraudulent or the misrepresentation was made fraudulently; the insurer may avoid the contract. 3. If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

43. INSURANCESuncorp v. Cheihk (1999) NSWCA 238 Cheihk insured his Porsche in January 1996. It was renewed in January 1997 and in February 1997, it was stolen. Suncorp refused to indemnify him for theft on the basis that he had fraudulently failed to disclose details of his poor driving record. Alternatively, he had breached his duty of disclosure under s. 21. Cheihk had an abysmal driving record from 1987. He had accumulated lots of points for traffic infringements which led to cancellation of his licence. Then in July 1996 he was convicted of driving while disqualified and had his licence cancelled for 6 months. Judge found for Cheihk - not guilty of fraudulent non-disclosure. Also Suncorp had not complied with s. 22 because the reference to duty of disclosure was hidden away and unhighlighted in any fashion….did not “clearly inform”. Onus on insurer to show it had complied. CA confirmed decision of Judge.

44. INSURANCE CONTRACT ACT s. 31 COURT MAY DISREGARD AVOIDANCE IN CERTAIN CIRCUMSTANCES 31 (1). In any proceedings by the insured in respect of a contract of insurance that has been avoided on the ground of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation, the court may, if it would be harsh and unfair not to do so, but subject to this section, disregard the avoidance and, if it does so, shall allow the insured to recover the whole, or such part as the court thinks just and equitable in the circumstances, of the amount that would have been payable if the contract had not been avoided.

45. S.31 …..in certain circumstances 2. The power conferred by subsection (1) may be exercised only where the court is of the opinion that, in respect of the loss that is the subject of the proceedings before the court, the insurer has not been prejudiced by the failure or misrepresentation or, if the insurer has been so prejudiced, the prejudice is minimal or insignificant. 3. In exercising the power conferred by subsection (1) the court: a) shall have regard to the need to deter fraudulent conduct in relation to insurance; and b) shall weigh the extent of the culpability of the insured n the fraudulent conduct against the magnitude of the loss that would be suffered by the insured if the avoidance were not disregarded; but may also have regard to any other relevant matter. 4. The power conferred by subsection (1) applies only in relation to the loss that is the subject of the proceedings before the court, and any disregard by the court of the avoidance does not otherwise operate to reinstate the contract.

46. 60 Cancellation of contracts of general insurance (1) Where, in relation to a contract of general insurance: (a) a person who is or was at any time the insured failed to comply with the duty of the utmost good faith; (b)…. failed to comply with the duty of disclosure; (c) …..made a misrepresentation to the insurer during the negotiations for the contract but before it was entered into; (d) ….failed to comply with a provision of the contract, including a provision with respect to payment of the premium; or (e) the insured has made a fraudulent claim under the contract or under some other contract of insurance (whether with the insurer concerned or with some other insurer) that provides insurance cover during any part of the period during which the first-mentioned contract provides insurance cover; the insurer may cancel the contract.

47. 60 Cancellation of contracts of general insurance cont (2) Where: (a) a contract of general insurance includes a provision that requires the insured to notify the insurer of a specified act or omission of the insured; or (b) the effect of the contract is to authorize the insurer to refuse to pay a claim, either in whole or in part, by reason of an act or omission of the insured or of some other person; and, after the contract was entered into, such an act or omission has occurred, the insurer may cancel the contract. (3) A reference in subsection (2) to an act or omission of the insured includes a reference to an act or omission of the insured that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter. (4) Where a contract of insurance is: (a) a contract that is in force by virtue of section 58; or (b) an interim contract of general insurance; the insurer may at any time cancel the contract.

48. After the contract is made In many contracts, there is a requirement for the Insured to do things after the contract is made-keep insurer informed, provide up to date information, notify accidents or incidents, claims. E.g. Professional Indemnity Insurance-one must notify as soon as one is aware of a potential claim-a mistake, negligence. Can the insurer refuse a later claim if this condition of the contract is not met?

49. 54 Insurer may not refuse to pay claims in certain circumstances (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act. (2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

50. 54 Insurer may not refuse to pay claims in certain circumstances cont. (3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act. (5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or (b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act. (6) A reference in this section to an act includes a reference to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.