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Chris Peadon[*]
The recent decision of the High Court of Australia in Permanent Trustee Australia Limited v FAI General Insurance Company Ltd (in liq)[1] identifies an important distinction between matters relevant to the risk insured and other 'matters of commerciality' in relation to an insured's duty of disclosure under the Insurance Contracts Act 1984 (Cth) (the Act). This case note discusses the implications of this decision for insurance contracts regulated by the Act.
Permanent Trustee had obtained professional indemnity insurance for the period 1 October 1990 to 30 September 1991, with Sedgwick acting as its brokers. Cover was arranged in layers and the primary layer was lead by a Lloyds syndicate. FAI was one of the excess insurers with a total financial exposure amounting to $10.2 million.
In August 1991, Permanent Trustee instructed Sedgwick to begin the renewal process. However, by that stage, Sedgwick was concerned about FAI's financial stability (as it had been downgraded by Standard & Poor's) and, as a result, Sedgwick and Permanent Trustee decided not to place the renewal with FAI, if it could be placed elsewhere.
On 20 September 1991, the lead underwriter asked to see more information before it was prepared to renew and, given the shortage of time before the date of renewal, suggested that the existing cover be extended for 30 days on the basis of a pro-rated premium. Sedgwick sought the agreement of all the insurers on risk to the proposed 30 day extension, including FAI.
The task of approaching FAI fell to a junior employee, Mr Welsh. Mr Welsh spoke to FAI and asked them to agree to the 30day extension. Mr Welsh was instructed not to mention Sedgwick's intention not to renew the insurance with FAI. FAI agreed to the 30 day extension. The first instance judge found as fact that:
| 1. | FAI's underwriter believed that it would be invited to quote for participation in the renewal;[3] and |
| 2. | FAI would not have granted the extension if it knew that Permanent Trustee did not intend to invite it to participate in the renewal.[4] |
During the 30day extension period, Permanent Trustee notified a circumstance arising that ultimately lead to a claim. The total claim was settled for $100.1 million, of which $36 million fell to insurers. Both layers in which FAI participated were total losses.
FAI refused to meet its share of the money payable on settlement and Permanent Trustee commenced proceedings against FAI.
The Act regulates the insured's duties of disclosure. Section 21 provides that, before entering into a contract of insurance, an insured has a duty to disclose to an insurer:
Section 26(2) provides that a statement made by a person in connection with a proposed contract of insurance is not a misrepresentation unless the person who made the statement knew (or a reasonable person in the circumstances could be expected to have known) that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.
In Permanent Trustee v FAI, the principal question on which the High Court was asked to rule was whether Permanent Trustee had breached its duty of disclosure under s21(1)(a) of the Act.
The critical issue was the meaning of the phrase ‘relevant to the decision of the insurer whether to accept the risk’ as it appears in both ss21(1)(a) and 26(2).[5]
Chief Justice Hodgson held that Permanent Trustee breached its duty of disclosure under s21(1)(a)[6] and made a misrepresentation pursuant to s26(2) by failing to inform FAI of its intention not to renew.[7]
This decision was appealed and the NSW Court of Appeal[8] upheld the findings of Hodgson CJ in finding that:
| 1. | The decision not to offer renewal terms and, if possible, to place the business elsewhere should have been disclosed under s21(1)(a) when Sedgwick sought the extension.[9] |
| 2. | The knowledge of Sedgwick was the knowledge of Permanent Trustee for the purpose of deciding whether Permanent Trustee had breached its duty of disclosure under s21(1)(a)[10] and, therefore, Permanent Trustee had breached its duty of disclosure. |
| 3. | Mr Welsh's omission fell within the meaning of 'statement' in s26(2).[11] Accordingly, Permanent Trustee had made a misrepresentation under s26(2) as Sedgwick knew FAI thought it would be asked to renew the contract and Sedgwick did not correct that mistaken view. |
Permanent Trustee was granted special leave to appeal to the High Court.
By a majority of 3 to 2 (joint judgment of McHugh, Kirby and Callinan JJ with Gummow and Hayne JJ dissenting) the High Court allowed the appeal. The majority decided that Permanent Trustee did not breach its duty of disclosure and did not misrepresent the risk.
The majority said that an insured's disclosure obligations relate only to those matters which the insured knows (or a reasonable person in the circumstance could be expected to know) are relevant to the insurer's assessment of the risk and, if so, on what terms. This decision was based on the interpretation of ss 21 and 26 of the Act. The majority distinguished between:
1. those matters that are relevant to an assessment of the insured risk (such as the nature of the insured's business); and
2. those matters of a commercial nature which have no bearing on the risk but may influence the insurer's decision whether or not to enter into the contract of insurance.[12]
The majority decided that the insured was under no obligation to disclose matters falling into the second category.[13] Whether the insured would, at a later date, renew the insurance contract with FAI, fell into this second category.
This finding was based on the majority observing that:
| 1. | The phrase 'accept the risk' was deliberately chosen by the Parliament, a phrase that has 'a long settled meaning at common law'. ('emphasis added') |
Although the majority did not refer to any specific case law, the minority referred to the submission of Permanent Trustee that phrases such as 'accepting the risk',[14] 'accepting the proposal',[15] 'accepting the insurance'[16] and other 'cognate phrases, should be understood as confining considerations or materiality, under the law as it stood before the Act, to matters that affected the nature or extent of the risk insured [and] they...should not be understood as extending the range of materials matters.'[17]
| 2. | The focus of attention on the risk is indicated by s21(2) which provides that the insured need not disclose a matter 'that diminishes the risk'.[18] |
| 3. | If the language did extend to commercial matters, the Act would not have its intended ameliorative effect, but would 'be used as a charter for avoidance of claims by insurers.[19] |
It appears that there were two considerations underlying the majority's decision.
1. The majority considered that if the insured was obliged to disclose commercial matters, it would impose 'an extraordinarily high burden'[20] upon an insured and indeed the range of commercial matters that would have to be disclosed would be 'almost boundless'.[21] To illustrate this point, the majority considered that to follow the findings of Hodgson CJ and the Court of Appeal would result in an insured being obliged to disclose to an insurer with whom it wishes to continue doing business that it intends to seek a competitive quote or more extensive coverage, a result the majority did not believe was intended by the legislature.[22] The majority also expressed the view that such matters would be common knowledge or something which an insurer should know in the ordinary course of business and, accordingly, should not be required to be disclosed pursuant to s21(2).[23]
2. The majority also considered that the purpose of the Act was to ameliorate the pre-existing common law rules on disclosure and concluded that to impose an obligation to disclose commercial matters on the insured would not give the Act its ameliorative effect, but instead 'allow it to be used as a charter for avoidance of claims by insurers'.[24]
The minority's view was that Permanent Trustee had breached its duty of disclosure. In essence, the minority thought that the Act does not support the distinction between those matters relevant to the acceptance of the risk and those matters of a commercial nature.
The minority reasoned that Part IV of the Act 'is a statutory code which replaces the common law, and, therefore, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited.'[25] Moreover, reference to the common law is of limited utility as materiality is determined by the 'prudent insurer' test whereas the Act prescribes a 'particular insurer' test in ascertaining relevance.[26] The prudent insurer test assumes that the insurer's decision will be 'taken on rational commercial grounds.’ Accordingly, the common law test is concerned with the sole consideration 'central to the business judgment of any insurer – the nature and extent of the risk to be insured.'[27]
The minority reasoned that a particular insurer may be concerned with other considerations and undue weight should not be placed on the 'particular verbal formula'. For instance, the phrases ‘accept the risk', 'accept the proposal' and 'accept the insurance' were used as if they were all synonymous expressions.’[28]
According to the minority there is no reason to limit the class of matters that must be disclosed when it is recognised ‘that the matter must be ‘known to the insured’, being either a matter which the insured knows or which a reasonable person in the circumstances could be expected to know to be relevant to the insurer’s decisions'.[29]
The minority considered that the obligation to disclose such matters ‘is not unduly burdensome’ and is not inconsistent with the intended ameliorating affect of the Act on the common law duty of disclosure, especially when it is recalled that the insured is not obliged to disclose ‘matters of common knowledge or matters that the insurer knows, or in the ordinary course of its business ought to know.’[30] Gummow and Hayne JJ stated that their finding was based on the unusual facts of the case in which the insured knew that the intention to seek alternative quotations and consider placing the risk elsewhere were matters relevant to the insurer’s decision to accept the risk and that 'it will indeed be rare for an insurer to be able to demonstrate that such common place commercial behaviour was not known to it.’[31]
The decision of the majority relies on the interpretation of the common law to support the distinction between matters relevant to an assessment of the risk and matters of commerciality. The decisions of Hodgson CJ and the Court of Appeal were based on the unusual circumstances of the case, that is, the insurer was able to demonstrate that particular commercial considerations were relevant to its decision to accept the risk and that this was known to the insured. The majority's concern that to allow the appeal and fail to exclude matters of commerciality from the duty of disclosure will 'open a Pandora's box involving a large range of other considerations' is perhaps a little far fetched.
As an insurer accepts a risk by entering into a contract, the distinction between matters relevant to the risk and matters relevant to the decision whether or not to enter into the contract may be difficult to make in some instances.
The decision in Permanent Trustee v FAI leaves undecided the issue of whether an insured is obliged to respond to questions in a proposal form that expressly address 'commercial matters'. If the insured has no duty to disclose information relating to commercial matters, arguably a proposal form cannot create a duty to do so. This is of particular significance to insurers, given that the Act provides the only remedies for misrepresentation and non-disclosure.[32]
The Court of Appeal upheld the trial judge's finding[33] that as Permanent Trustee had delegated its duty of disclosure to Sedgwick, the knowledge of Sedgwick was the knowledge of Permanent Trustee for the purpose of s21.[34]
Although they did not decide the issue, the majority expressed the view in obiter dicta that the knowledge of which s21 speaks in requiring disclosure of ‘every matter that is known to the insured, is the (actual or constructive) knowledge of the insured, and not of any insurance intermediary, a term defined by the Act and clearly embracing an agent of the kind that Sedgwick was.’[35]
This limits the duty of disclosure of an insured under s21 to matters that the insured personally knows. Accordingly, the insured will not be obliged to disclose information known only to the broker. If followed, this view could have profound effects on the extent of disclosure required. It has also created a degree of uncertainty about the status of agents' knowledge generally which will not be clarified until the Court considers this issue again.
It is worth highlighting the approach of the dissenting minority. Gummow and Hayne JJ considered that an insured should be considered to know whatever its agent knows.
A corporate insured can know something only through an agent (that is, its directors). In the context of a section governing the duty of disclosure, the knowledge of an agent to effect the insurance is the knowledge of the insured.[36]
The policy underlying the minority's view is that where an insured has delegated to an agent the duty to make disclosures to an insurer, the agent is bound to disclose what it knows; it is not for the insured to decide which matters to disclose and when such disclosures are to be made.
The minority's approach is more rational and is to be preferred.
[*] Lawyer, Allens Arthur Robinson, Melbourne.
[2] (2003) 197 ALR 364, 365-367 (McHugh, Kirby and Callinan JJ); and 374-375 (Gummow and Hayne JJ).
[3] Permanent Trustee Australia v FAI General Insurance Co Ltd [1998] NSWSC 1011; (1998) 44 NSWLR 186, 262.
[4] Ibid 258.
[5] (2003) 197 ALR 364, 371 (McHugh, Kirby and Callinan JJ); and 377 (Gummow and Hayne JJ).
[6] (1998) NSWLR 186, 262 (Hodgson CJ) .
[7] Ibid.
[8] Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679 (Handley, Meagher and Powell JJ).
[9] Ibid, 687 (Handley JA, with whom Meagher and Powell JJA agreed).
[10] Ibid, 698 (Handley JA, with whom Meagher and Powell JJA agreed).
[11] Ibid 701 (Handley JA, with whom Meagher and Powell JJA agreed).
[12] (2003) 197 ALR 364, 372 (McHugh, Kirby and Callinan JJ).
[13] Ibid.
[14] See Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514, 523.
[15] See Western Australian Insurance Co Ltd v Dayton [1924] HCA 58; (1924) 35 CLR 355, 365.
[16] See Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228, 239; Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514, 517.
[17] (2003) 197 ALR 364, 381 (Gummow and Hayne JJ).
[18] (2003) 197 ALR 364, 372 (McHugh, Kirby and Callinan JJ).
[19] Ibid.
[20] Ibid.
[21]Ibid.
[22] Ibid.
[23] Ibid. Subsection 21(2) provides that 'the duty of disclosure does not require the disclosure of a matter...(b) that is of common knowledge ...[or] (c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know...'.
[24] Ibid.
[25] This view was supported by Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606, 615 (Mason CJ, Dawson, Toohey and Gaudron JJ) cited at (2003) 197 ALR 364, 376 (Gummow and Hayne JJ).
[26] The majority stated that the common law was an indication (not conclusive evidence) that the focus of the Act is on the risk as, although the phrase 'accept the risk' had a settled meaning in the common law, the Act was not an enactment of the common law. 'The common law was generally concerned with materiality. This Act is concerned with relevance.' See Ibid 372 (McHugh, Kirby and Callinan JJ).
[27] Ibid 382 (Gummow and Hayne JJ).
[28] Ibid 381 per Gummow and Hayne JJ. Refer to the earlier discussion of the minority's summary of Permanent Trustee's submissions on this issue.
[29] (Ibid 382 per Gummow and Hayne JJ.
[30] Ibid.
[31] (Ibid 383 per Gummow and Hayne JJ. Refer to ss21(2)(b) and (c).
[32] See s33 of the Act.
[33] [1998] NSWSC 1011; (1998) 44 NSWLR 186,262
[34] (2001) 50 NSWLR 679,698 per Handley JA with whom Meagher and Powell JJA agreed.
[35] (2003) 197 ALR 364,371 per McHugh, Kirby and Callinan JJ.
[36] Ibid 385 per Gummow and Hayne JJ.
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