Insurance Act, 1902
4.1 Section 18 of the Insurance Act, 1902, the terms of which are set out in paragraph 1.3, became law on 13 December, 1974. The Parliamentary debates leading to the enactment of section 18 suggests that some members considered that the section would resolve many of the problems created by the common law rules relating to non-disclosure and misrepresentation discussed earlier.
4.2 In the Second Reading speech in the Legislative Assembly, the Minister of Justice, the Hon J.C. Maddison stated the broad purpose of the legislation as follows:
[N]ew provisions are being inserted which will enable the court to excuse any failure by an insured person to observe or perform a term or condition of a contract of insurance where the insurer has not been prejudiced by the failure. Until now this provision has been limited to insurance relating to goods the subject of a hire purchase agreement It is now to apply generally. It is designed, of course, to prevent advantage being taken of a mere technicality.
The Minister made no direct mention of basis of contract clauses, the examples given being confined to breach of contractual provisions arising after the contract had been made.1 In the Legislative Council, the Second Reading speech added little to the statements made in the lower House.2 However, some members examined the scope of the legislation in relation to the problems experienced when proponents for insurance complete proposals. A Government member, the Hon. T.S. McKay, said:
... I believe that probably the greatest advance in the consumers’ interests is in relation to contracts of insurance... [N]o longer will an inaccuracy in a contract of insurance that does not prejudice the insurer void the contract In other words, there is to be a departure from the old legal principle of the utmost good faith or uberrima fides. This is a great step towards closer and fairer contracts between the parties. An insurer will not escape liability to pay the insured if the insured has given an incorrect answer in the proposal to a non-material question. Too much use has been made of this loophole by unscrupulous companies at the expense of innocent parties.3
Speaking for the Opposition, the Hon D.P. Landa, commended the Bill:
The insurance provisions of the Bill are essentially good, and we support them, especially the power of the court to excuse failure by non-observance of a non-prejudicial disclosure. This point has often been seized upon by uncharitable insurance companies. They take the point that full disclosure has not been made and, insisting on the principle of full bona fides in an insurance policy, they refuse to pay out on a claim, notwithstanding that the non-disclosure has nothing whatsoever to do with the risk undertaken
Provided that the insurance company is not prejudiced, we support the Government’s intentions in this regard to allow the court to overrule these company moves to seize upon that technical loophole. All of us in this House from time to time have had some contact with someone who has had a claim refused because of these technical loopholes. One company for a time specialized in taking policies where it knew a person had failed to disclose a relevant fact knowing that in the end it would not have to pay out on any claim.4
4.3 The legislative history of section 18 of the Insurance Act, 1902 is as follows:
- The Hire-Purchase Act, 1960 (N.S.W.) introduced new provisions relating to goods comprised in hire-purchase agreements. Section 21 gave relief to hirers under hire-purchase agreements in relation to insurance contracts. The terms of section 21(1) were identical to those later employed by section 18 of the Insurance Act, 1902:
In any proceedings taken in any court in respect of any difference or dispute arising out of a contract of insurance if it appears to the court that a failure by the insured or the hirer under the hire-purchase agreement concerned to observe or perform a term or condition of the contract of insurance may reasonably be excused on the ground that the insurer was not prejudiced by the failure, the court may ... order that the failure be excused.
Provisions of this kind were also adopted in the legislation of other States.5
- The Commercial Transactions (Miscellaneous Provisions) Act 1974 (N.S.W.) amended various Acts including the Hire-Purchase Act, 1960 (although section 21 remained intact) and the Life, Fire, and Marine Insurance Act, 1902. The latter Act was renamed the Insurance Act, 1902 and a new Part VI was inserted which included section 18.6 This section followed the language of section 21 of the Hire-Purchase Act 1960, but is of general application in New South Wales. The terms of section 18 which are still in force, have already been set out in paragraph 1.3 above.
Contracts Review Act, 1980
4.4 The Contracts Review Act, 1980 offers relief to persons affected by “unjust contracts”. The Supreme Court and the District Court are given extensive powers to avoid, vary, and otherwise control any contract or provision of a contract found “to have been unjust in the circumstances relating to the contract at the time it was made” (section 7). Subject to limited exceptions, the Act does not extend to contracts “entered into in the course of or for the purpose of a trade, business or profession” (section 6(2)). Section 9 of the Act provides criteria whereby the courts may determine “whether a contract or a provision of a contract is unjust”. These include, among other things, the following:
The Act seems to apply to an insurance policy entered into by a private citizen although it contains no specific reference to contracts of insurance. There have been as yet few decisions invoking the powers conferred by the Act.7 Accordingly, the extent of its scope and operation in practice remain to be seen. Nonetheless, the Act should not be disregarded as a measure capable of affording relief to an insured person adversely affected by a basis of contract clause or the provisions of an insurance contract which may be unjust. However, in our view it should not be regarded as the principal means of overcoming the deficiencies in section 18 of the Insurance Act, 1902. Rather, it should be seen as a source of additional assistance to insured persons in circumstances not covered by the Insurance Act, 1902 or other legislation specifically concerned with contracts of insurance.
Consumer Credit Act, 1981
4.5 The Consumer Credit Act, 1981 has reformed the law in relation to some contracts of insurance. The Act is not of general application but relates only to “regulated contracts” and “regulated mortgages”, defined in the Act Generally speaking, these are credit sale contracts and certain types of consumer loan contracts. The Consumer Credit Act, 1981 received the Royal Assent on 30 December, 1981 but has not yet commenced.8 Sections 137 and 138 of the Credit Act 1981 of Victoria are identical with sections 137 and 138 of the Consumer Credit Act, 1981 of New South Wales.
4.6 Section 137 provides that a contract of insurance within its reach is not void or unenforceable:
(a) by reason only of a false or misleading statement made in or in connection with the contract or a proposal, offer or document that led to the entering into, reinstating or renewing of the contract unless the statement was material to the insurer in relation to the contract of insurance and
(b) by reason only of an omission of matter from the contract or a proposal, offer or document that led to the entering into, reinstating or renewing of the contract unless the matter omitted was material to the insurer in relation to the contract of insurance and
Section 138 provides that where by or under the provisions of a contract of insurance within its reach:
(a) the circumstances in which the insurer is bound to indemnify the insured are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of particular events or on the existence of particular circumstances; and
(b) the liability of the insurer has been so defined because the happening of those events or the existence of those circumstances was in the view of the insurer likely to increase the risk of loss occurring,
the insured shall not be disentitled to be indemnified by the insurer by reason only of those provisions of the contract of insurance if, on the balance of probability (the onus of proof being upon the insured) the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of those events or the existence of those circumstances.
This section has its origin in the Insurance Law Reform Act 1977 (N.Z.), section 11, referred to in paragraph 5.5 below.
Effect of Sections 137 and 138 of Consumer Credit Act, 1981
4.7 Sections 137 and 138 substantially modify the effect of the common law and existing rules relating to non-disclosure, misrepresentation, basis of the contract clauses, and clauses excluding or limiting liability.
4.8 The common law allows no exception to the rule that failure to disclose a material fact entitles an insurer to avoid the policy ab initio. Section 18 of the Insurance Act, as we have explained, has been held to be inapplicable to the common law duty of disclosure, since it is concerned only with failure on the part of an insurer to observe or perform a term or condition of the contract of insurance. Further, the test of absence of prejudice to the insurer which it provides presents a practical difficulty. A court may find it difficult to hold that there has been no prejudice where there has been a material non-disclosure. Section 18 does not require the “prejudice” to be substantial. It follows that an insurer who sustains any prejudice from a failure to observe or perform a term of the contract of insurance would have an argument that the power to excuse, conferred by the section could not be exercised. Since a material fact is one which a prudent insurer would wish to know in deciding whether to accept the risk or in determining the appropriate premium, there would be few cases of, say, failure to disclose a material fact (assuming the failure to be within section 18) where the insurer would not suffer some prejudice.
4.9 We believe that the potential for an unfair application of the rigid common law rules, and the inadequacy of section 18 of the Insurance Act, 1902 to cope with the problem can be overcome by extending generally the operation section 137(a) of the Consumer Credit, 1981. That section is specifically directed to omissions from proposals, offers or documents leading to the making of a contract of insurance. The section is not confined to cases where there is a breach of a contractual term or condition. It is therefore capable of applying to a breach by the insured of the common law duty of disclosure.
4.10 In order for an insurer to rely on material non-disclosure to refuse liability for a claim under a policy to which the Act applies, two tests must be satisfied:
- the non-disclosure must be of matter which is material to that insurer in relation to the contract in question; and
- the non-disclosure (omission) must have either been deliberate, or the insured must have known or ought reasonably to have known that the matter omitted was material to the insurer in relation to the contract
4.11 The section does not sweep away the concept of materiality, but the first test focuses upon the omission of matter which is material to the actual insurer concerned. “Material” in this context relates to matter which that insurer considers relevant in deciding whether or not to accept any particular risk offered f or insurance, and in rating it for premium purposes. The second test satisfies the legitimate interests of insurers by excluding from relief undeserving proponents for insurance who either deliberately omit information material to the insurer, or who actually know or ought reasonably to know that matter material to the insurer has been omitted. It also accommodates the legitimate expectations of honest and careful proponents for insurance, by protecting an innocent person who could not reasonably be expected to have known that matter material to the insurer had been omitted.
4.12 We turn next to misrepresentation by the insured in the proposal or offer for insurance. So far as a misstatement or misrepresentation maybe fraudulent no occasion for relief arises, and the legislative reform we suggest would not provide any relief. The area of concern is with innocent and immaterial misstatements made in the proposal, which are made the basis of the contract or which are accompanied by warranties as to their accuracy. For the reasons already mentioned it seems that section 18 does not provide any relief in such a case.
4.13 We are of the view that an insured who has made such an innocent and immaterial misstatement should be able to obtain relief from the court Section 137(a) is capable of providing that remedy. There is no foundation for suggesting that it cannot apply where the insurer employs a basis of contract provision and we think it fair that the section should apply in such a case. Again, the legitimate needs of the insurer are protected, since the section focuses upon statements which are material to the actual insurer in respect of the contract of insurance in question. If the misstatement is not material in that sense, the policy should be enforced. The insurer is also protected in that the section is not available to the undeserving proponent for insurance who has made the false or misleading statement fraudulently or who knows or ought reasonably to have known that the statement was material to the insurer in relation to the actual contract.
4.14 The section goes further than section 84 of the Life Insurance Act, 1945 (Cth) and section 25 of the Instruments Act 1958 (Vic.) referred to in paragraphs 5.1 and 5.3, below, in that it is not confined to misrepresentations in written form.
4.15 We are of the view that section 137(a) is adequate in itself to excuse misrepresentations in basis of the contract policies. However, in appropriate circumstances, section 138 might also be called in aid.
4.16 Section 138 empowers a court to permit an insured person to remain indemnified in the face of a clause in an insurance contract which specifically excludes or limits the liability of the insurer. Assume, for example, that a basis of contract clause in afire insurance policy gives the insurer the right to avoid the contract if any statement made by the insured in the proposal, including statements unrelated to the risk insured (such as the insured’s prior health history), are not correct. If the building covered by the policy is destroyed by fire and the insurer seeks to avoid liability on the ground that the insured s proposal had failed to reveal a minor illness suffered some years earlier, section 138 would preserve the insured’s right to indemnity.
4.17 The concern of section 138 is with provisions in insurance contracts which exclude or limit the liability of insurers to give indemnity, and may be compared with section 11 of the Insurance Law Reform Act, 1977 (N.Z.), referred to in paragraph 5.5, below. Again a reasonable accommodation between the competing interests of insurers and insured is achieved. Exemption clauses and limitation clauses can still be invoked by insurers, where the loss is caused or contributed to by the happening of the events or circumstances to which the clauses are directed. In such circumstances, the insured may be taken to have had ample warning of their possible application. There is therefore no unfairness in the insurer relying on those clauses, so long as there is a true nexus with the loss. However, where there is no connection between the loss and an event or circumstance triggering an exclusion or limitation there will usually be no good reason to refuse indemnity to the insured. Except for the special circumstances discussed in paragraphs 7.3 3 and 7.34, to allow the insurer to rely on such a clause to decline liability is, in our view, an unjustified inroad into the legitimate expectations of the insured, and an unnecessary and unfair addition to the armour of the insurer.
Section 137 and Kolokythas
4.18 It is of interest to consider how the question in Kolokythas9 might have been approached if a statutory provision in terms of section 137 had been applicable. It would be necessary for the court to determine, first, whether the insurers failure to disclose that planning consents had expired “was material to the insurer in relation to the contract of insurance”. At this stage the concept of materiality is subjectively determined in relation to the particular insurer. If the insurer could show materiality in this sense (as seems likely), it would then be necessary for the court to decide whether the insured had deliberately omitted to supply the information or, alternatively, knew or ought reasonably to have known that matter material to the insurer had been omitted. if the insurer could satisfy the court on the balance of probabilities (assuming that the section places the onus on the insurer) as to either of these matters it would be able to rely on the non-disclosure as a defence to the claims. Proof that the insured had deliberately omitted information, or knew that material matter had been omitted, would, of course, require an investigation of the insured s state of mind at the relevant time. If the insurer could not prove deliberate omission or knowledge by the insured, the outcome of the case would depend upon whether the insured ought reasonably to have known that material matter had been omitted. In this respect it seems that the court would be required to apply an objective standard against a matrix of facts which would include matters personal to the insured. Thus in assessing what the insured should reasonably have known, it seems likely that the court would take into account such factors as the kind of insurance provided under the policy, the previous experience of the insured in relation to such policies, the insured s business sophistication (or lack of it), explanations and warnings in the proposal form, the insured’s appreciation of the information regarded by the insurer as material, and legitimate expectations as to what ordinary insured persons might be assumed to know in relation to the requirements of insurers. Ultimately, therefore, the decision would depend upon the courts assessment of the facts, although in the case of an insured with significant business experience, the insurer might be expected to be in a strong position.
Section 137 and Bazouni
4.19 Bazouni10 was different in degree from Kolokythas, in that it involved not merely non-disclosure of a fact but a misrepresentation. The insured signed a proposal which included a false declaration that no insurer had cancelled any policy of insurance previously held by her. The insured also failed to disclose the cancellation. This was clearly material to the insurer in relation to the contract of insurance. Assuming that a statutory provision in the terms of section 137 had been applicable, both of its subsections would have been attracted. This would have meant that if the insured had been innocent of fraudulent intent and deliberate omission (for example, because she did not understand the statement in the proposal, or her duty of disclosure), the insurer would have been able to resist the claims only by proving that the insured knew or ought reasonably to have known that the misrepresentation was material, or knew or ought reasonably to have known that the matter was material to the insurer but had been omitted.
4.20 It is unlikely that the insured, a migrant with little command of the English language, had actual knowledge that the misstatement was material to the insurer, or that there had been an omission of matter material to the insurer. Accordingly, the case would probably have turned on the question whether the insured ought reasonably to have known those matters. The section could be interpreted as excluding from consideration circumstances (such as language difficulties) personal to the insured. But in our view the section permits a determination based on a matrix of facts and circumstances, including matter personal to the insured and matters within the reasonably expected contemplation and understanding of average proponents of insurance of the kind in question. No doubt an insurer could argue that ordinary good sense would suggest that a new insurer would wish to be informed that another insurer had recently refused to renew the insurance, at least where reasons were given (although this is not the position in marine insurance).11 We do not see any difficulty in leaving it to the courts to decide the issue in any given case.
Section 137 and Lambert v. Co-operative Insurance Society Limited12
4.21 We next illustrate the possible application of section 137 to a case decided by the English Court of Appeal. In April, 1963 the plaintiff signed a proposal form for an all risks insurance policy to cover her own and her husband’s jewellery. No questions were asked and the plaintiff gave no information about any previous convictions. The plaintiffs husband, to her knowledge, had been convicted some years earlier of receiving 1,730 cigarettes, knowing them to have been stolen. He had been fined 25. The insurer was unaware of the conviction and issued the policy, a condition of which provided that the policy would be treated as void should there be an omission to state any fact material for estimating the risk. The policy was renewed each year, the last renewal being in March 1972. In December, 1971, the plaintiffs husband was convicted of two further offences of dishonesty and sentenced to imprisonment for 15 months. This was not disclosed to the insurer. In April, 1972 the plaintiff made a claim for the value of seven items of the insured jewellery which were either lost or stolen The insurers repudiated the claim on the ground of the non-disclosure of the first conviction of the plaintiff’s husband before the contract was concluded, and on the further ground of the failure to disclose the second set of convictions when the policy was last renewed. The insurer succeeded before the trial judge and the Court of Appeal dismissed the appeal.
4.22 The only witness called for the insurer, its branch manager, said that while the company would have wished to know in 1963 of the first conviction and would have given it careful consideration, probably the policy would have been issued just the same. However, he did say that he would not have invited renewal had he known of the 1971 convictions. The plaintiff contended that the duty was to disclose only what a reasonable insured would consider material, this being the test recommended by the Law Reform Committee in its 1957 report.13 This test was rejected both by the trial judge and the Court of Appeal although the former took the view that had it been the appropriate test the case would have been decided the other way. In the Court of Appeal Mr. Justice MacKenna expressed his
personal regret that the Committee’s recommendation has not been implemented. The present case shows the unsatisfactory state of the law. Mrs. Lambert is unlikely to have thought that it was necessary to disclose the distressing fact of her husband’s recent conviction when she was renewing the policy on her little store of jewellery. She is not an underwriter and has presumably no experience in these matters. The defendant company would act decently if, having established the point of principle, they were to pay her. It might be thought a heartless thing if they did not, but that is their business, not mine.14
4.23 We think that section 137 could operate to relieve the insured in a case such as this, although we recognise that there could be different views as to whether or not a reasonable insured should expect that an insurer will wish to know that a spouse has been convicted of dishonesty. In the absence of any specific questions concerning convictions of persons other than the proponent, the observations of the Court of Appeal in Lambert support the argument that the insured ought not reasonably to have known that matter material to the insurer had been omitted. if, as we suggest in paragraph 7.28, the court should take into account the circumstances of the insured in determining whether his or her conduct was reasonable, the argument that section 137 can be applied to the facts of Lambert so as to relieve the insured is stronger.
Section 137 and Preece v. The State Insurance General Manager15
4.24 We next pose as an example the facts of a recent New Zealand case. The insurer had issued a motor vehicle policy following completion of a proposal. One question in the proposal asked “Has the vehicle or its engine been modified in any way since manufacture?” The answer supplied was “Yes. Replace and install standard 2000 cc.” In fact in order to accommodate the larger engine, a new gearbox and a new exhaust manifold had also been supplied. There was expert evidence to the effect that such additional modifications were essential, and should have been expected by anyone familiar with motor engineering. In addition wide rear rims with radial tyres had been fitted.
4.25 A claim was made under the policy following damage to the vehicle when it skidded off a gravel road. The fitting of the gearbox, manifold, wheels and tyres was found to have had nothing to do with the accident. The insurer declined to indemnify the insured on the basis that the answer in the proposal had not disclosed “extensive modifications” and that as a consequence it was entitled to avoid the policy. The misstatement was excused under the New Zealand Act on the basis that it was not “substantially incorrect”, nor “ material”, within the meaning of these expressions as defined by the Act. For the purposes of the discussion we shall add a further fact which so far as the report shows was not present, namely that the truth of the answers given was warranted, and that the proposal was made the basis of the policy.
4.26 We consider that section 137 could be applied to excuse the misrepresentation and non-disclosure, and to overcome the basis of the policy provision We assume, as was found, that the answer given was misleading, being an incomplete answer affecting the truth of the statement made, and we further assume that the incomplete answer was not made fraudulently or deliberately. in these circumstances if there was no basis for finding actual knowledge that the additional information not supplied was material to the insurer, a strong case could be made that the alterations were not of a kind which a proponent for insurance ought reasonably to have known were material to the insurer. It would be necessary to consider the significance of the modifications which were consequential upon the disclosed installation of a larger engine, and the fitting of radial tyres on wheels of a common variety. Again this is a matter which we consider could best be left to the court to determine objectively having regard to any explanations or warnings given by the insurer, the expectations of ordinary proponents for insurance, and any particular knowledge or prior experience of the proponent in question.
Sections 137 and 138 - Some Conclusions
4.27 It can be argued that the tests specified by section 137, which include a combination of subjective and objective matters, may lead to uncertainty. There is some force in this argument, since the statutory language requires an assessment to be made of the insured’s state of mind, or the knowledge that he or she ought reasonably to have had in relation to the contract of insurance. However, one answer is that such uncertainty is not an unreasonable price to be paid to avoid the harshness inherent in the common law, which may achieve certainty at the cost of unfairness to an innocent insured. We take the view that the changes effected by section 137 (and those adopted by section 138) achieve a fair accommodation between the respective interests of the insured and the insurer and constitute a marked improvement upon the common law rules and the provisions of section 18 of the Insurance Act, 1902. We return to this question in Chapter 7.
FOOTNOTES
1. N.S.W. Parl. Deb. (Leg. Ass.), 8 October, 1974, pp. 1699-1706, esp. p.1705.
2. N.S.W. Parl. Deb. (Leg. Council), 20 November, 1974, p. 2975.
3. Ibid., pp. 2982-2983.
4. Ibid., pp. 2980-2981.
5. See, for example, Hire Purchase Act 1959 (Vic.), s.21 (1) and statutes cited in R. Else-Mitchell and R Parsons, Hire-Purchase Law (4th ed. 1968), p.142.
6. Commercial Transactions (Miscellaneous Provisions) Act. 1974 (N.S.W.), s.6.
7. See, for example, Partyka v. Wilkie [1982] ASC 55-213, Supreme Court of New South Wales (Needham J.).
8. Commencement will be delayed, we understand, until certain administrative arrangements are completed which involve contemporaneous commencement between the States of New South Wales and Victoria.
9. See paras 2.1-2.3 above.
10. See paras. 2.4-2.7 above.
11. E.R. Hardy Ivamy, Marine Insurance (3rd ed. 1979), p.60.
12. [1975] 2 Lloyd’s Rep. 485.
13. Law Reform Committee, Conditions and Exceptions in Insurance Policies (Fifth Report Cmnd. 62, 1957), para. 14(1).
14. [1975] 2 Lloyd’ s Rep. 485, at p.491. Cf Regina Fur Co. Ltd. v. Bossom [1957] 2 Lloyd’s Rep. 466, where Pearson J. accepted as material a single conviction for receiving stolen property more than 20 years before the insurance was taken out.
15. [1982] 2 A.N.Z. Insurance Cases 60-493.
