Permanent Trustee v. FAI
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
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:
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:
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.
The issues on which the court was divided arose under sections 21 (duty of disclosure) and 26 (misrepresentation) of the Act. In particular
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.
These Case Notes have been prepared with care, but neither the Editor nor the International and other Contributors can guarantee that they are free from error, nor that they contain every pertinent point. Reliance should not therefore be placed upon them without independent verification. The Editor and the International and other Contributors disclaim all liability for any loss of whatsoever nature and howsoever arising as a result of others acting or refraining from acting in reliance on the contents of this website and the information to which it gives access. The Editor claims copyright in the content of the website.