Permanent Trustee v. FAI

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Permanent Trustee Company of Australia Limited & Anor v FAI General Insurance Co Limited (in liquidation)
High Court of Australia; McHugh, Gummow, Kirby, Hayne and Callinan JJ; [2003] HCA 25; 8 May 2003
Insurance: Obligations of insured to disclose to insurer: extension granted Where insured had decided "probably not" to renew policy for following year: Whether non-disclosure of intention not to renew amounted to failure to disclose a "matter relevant to the decision of the insurer whether to accept the risk" to extend policy under s 21(1)(a) of the australian Insurance Contracts Act 1984: Whether non-disclosure was a misrepresentation in breach of s 26(2) oF THE ACT

The High Court held that the section 21 Insurance Contracts Act 1984 (Cth) (the Act) disclosure test focuses on matters relevant to the decision of the insurer whether to accept the risk. These are matters that related to the insurance "hazard", rather than the "commerciality" of the insurance contract.

DMC Category Rating: Developed

Case note contributed by Mark Newton, lawyer at Ebsworth & Ebsworth Lawyers, Sydney. Ebsworth & Ebsworth Lawyers are International Contributors for Australia

The appellant companies, the Permanent companies, had professional indemnity insurance cover with a number of insurers. FAI General Insurance Co Limited (FAI) provided part of the excess cover on two of the excess layers. The Permanent companies retained Sedgwick James Limited (the broker) as its broker. The broker was instructed not to approach FAI for the annual renewal because a provisional decision had been made that FAI would be invited to participate only as a last resort.

Shortly before the renewal date, the lead underwriter asked the broker for some more information about the Permanent companies. While dealing with the enquiry, the lead underwriter offered to write a 30-day extension of the existing policy. The four Australian insurers (including FAI) all agreed to participate in the extension. The broker did not inform FAI of the provisional decision regarding the renewal. During the period of the extension, the Permanent companies notified their insurers of circumstances which could give rise to a claim on the policies. A claim was made and FAI refused to meet its share of the money payable when the claim was settled. The Permanent companies sued FAI in the Supreme Court of New South Wales.

At trial, Hodgson CJ found that, had FAI been informed of the provisional decision to renew the policy elsewhere, it would not have granted the extension. The trial judge also found that the broker anticipated that FAI might react in such a way if told of the decision. In those circumstances, the brokerís failure to disclose the matter was a breach by their principal of section 21(1)(a) of the Act (duty of disclosure). That section reads as follows:

"21(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."

The Permanent companies unsuccessfully appealed to the Court of Appeal (Meagher, Handley and Powell JJA) on the s.21 finding. The Court of Appeal extended the original findings by holding that, through their agent, the Permanent companies had also breached section 26(2) of the Act (misrepresentation). That section reads:

"A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be 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."

The Permanent companies appealed to the High Court.

By a 3-2 majority, the High Court upheld the Permanent companiesí appeal.

The issues on which the court was divided arose under sections 21 (duty of disclosure) and 26 (misrepresentation) of the Act. In particular

ē was the provisional decision to seek a renewal elsewhere relevant to FAIís decision to accept the risk (on the extension); and

ē if so, could the brokerís knowledge that this was relevant to FAIís decision be imputed to the Permanent companies?

The trial judge had found that FAI would have refused the extension (if told of the provisional decision not to renew with FAI) for commercial and emotional reasons unrelated to the insurance risk. Thus, the most critical question in the appeal was whether, for the purposes of sections 21 and 26 of the Act, such matters are matters relevant to an insurerís decision to accept a risk:

The majority (McHugh, Kirby and Callinan JJ) answered that question in the negative, pointing to the purposes for which sections 21 and 26 were enacted (being to ameliorate an insuredís disclosure obligations) as well as their statutory context. They also considered that to require disclosure of all matters unrelated to the assessment of the risk (but otherwise known to be relevant to the insurer) would impose an impractical burden on insureds, and "allow [the legislation] to be used as a charter for avoidance of claims by insurers". They highlighted that the Act uses the word "accept the risk" and also that the Act focused on the risk (the particular insurance hazard), and not the commercial willingness of the insurer to accept the risk, or emotional decisions by the insurer.

On the question of misrepresentation by silence, they said that the insurer has no right to the goodwill and custom of their insureds. They found it unnecessary to deal with whether the "risk", that is, the insurance hazard, extended to the "moral hazard" or "moral risk".

Gummow and Hayne JJ, in the minority, considered that no clear distinction could be drawn between matters which are relevant to an assessment of the insurance risk and matters (unrelated to risk) which are relevant to whether the insurer decides to write the insurance. They argued that the Act does not require or permit the making of such distinctions, and otherwise contains adequate safeguards against sections 21 and 26 becoming an undue burden on insureds. In their view, the most important such safeguard is that the insured must know (or be reasonably expected to know) that a matter is relevant to the insurer before any obligation to disclose the matter arises.

On the question of knowledge, McHugh, Kirby and Callinan JJ did not need to decide but cast some doubt on whether sections 21 and 26 of the Act would allow the knowledge of an agent or a broker to be imputed to their principal. They commented that the knowledge of which section 21(1) speaks (actual or constructive) is the knowledge of the insured, which does at least suggest that the reference to the knowledge is that of the insured personally but not the broker. They said that it was not necessary to decide the point. The minority judges considered that the Permanent companies had wholly delegated to the broker the performance of their duty of disclosure. In those circumstances, Gummow and Hayne JJ held that the brokerís knowledge could be imputed to the Permanent companies.

This decision implies that in sections 21 and 26 of the Act the phrase "relevant to the decision of the insurer whether to accept the risk" should be read as meaning "relevant to the insurerís assessment of the risk", being the insurance hazard. In light of this decision, matters that may be regarded as falling within the "commercial risk" category should be raised in proposal forms. There is some force in Gummow and Hayne JJís minority argument about the haziness of a distinction between matters that bear upon the nature and extent of the insurance risk and matters that do not (but are otherwise relevant to the insurer). It has also left open the question of whether there is a duty to disclose moral risks. In our view it is likely that the Courts will continue to accept that moral risks are part of the hazard risks rather than the commercial risks. The obiter comments by the majority have cast some doubt on the conventional view (and the view of the minority) that the knowledge of the insuredís agent, the broker, can then be imputed to the insured.


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