Insurance Update Commercial Lines June 2010

A little-discussed section of the Insurance Contracts Act has finally received judicial attention, more than 25 years after the Act was introduced.

The plaintiff, Mr Nelson, had contracted to buy a pleasure boat. He had it inspected by a marine surveyor prior to completing the purchase and the surveyor reported it was in “reasonable condition”. The same day (7 November 2008) he insured the boat with Hollard Insurance. The purchase was subsequently completed. On 21 November 2008, the boat was slipped at the Royal Sydney Yacht Club for routine maintenance when it suffered a “substantial structural failure” resulting in damage.

Mr Nelson claimed against Hollard under the policy. Although the policy covered both accidental damage to the boat and damage arising out of “occasional slipping, cradling and launching for the purpose of maintenance and repair”, the insurer denied indemnity on the basis of an exclusion clause. That clause provided that cover was excluded “for any loss or damage caused by or resulting from, or the costs incurred from or of: inherent defects, structural faults, faulty workmanship or faulty design”.

Mr Nelson sued Hollard in the NSW Supreme Court. At a hearing before Justice Einstein, the parties agreed that the damage to the boat arose out of an “inherent defect, structural fault, faulty workmanship or faulty design”. Mr Nelson however argued that the insurer was not entitled to rely on the exclusion clause because of the operation of s.46 of the Insurance Contracts Act.

That section provides:

“Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer's liability under the contract by reference to the condition, at a time before the contract was entered into, of the thing.”

Justice Einstein noted that there were no decided cases on s.46; although there was a decision on s.47, which was in basically identical terms except that it applied to pre-existing medical conditions.

Although accepting that the “defect” that resulted in the damage to the boat was pre-existing, Justice Einstein found that s.46 was directed to the wording of the policy, not to the particular facts of the case. The insurer was entitled to exclude certain events from the scope of the cover, subject to the provisions of the Act. In this case, the exclusion related to “loss or damage” arising from the stated conditions; not the conditions themselves.

In addition, the exclusion did not operate by reference to a pre-existing state of affairs. The relevant defects could arise at any time, not necessarily at a time before the policy was entered into. Finally, the exclusion did not operate “by reference to” a pre-existing condition; but rather to the later event of loss or damage arising out of the relevant condition.

Accordingly, Mr Nelson’s claim was dismissed.

Long tails hide dangers

The dangers of so-called “long-tail” claims for insurers are well known, but the High Court has come up with another potential complication for insurers writing policies that might be activated many years later. Although the case itself concerned workers compensation insurance, the principles enunciated will have application across a number of “long-tail” classes.

The primary claim was by the estate of a worker who had been exposed to asbestos dust between 1964 and 1967. The claim had been successful and judgment had been given against the worker’s employer (Pilkington) and the company that supplied the asbestos products (Wallaby Grip). Pilkington had workers’ compensation insurance at the relevant time; and QBE was the successor for the insurer under that policy.

While the policy was a statutory policy, at the time the legislation was rather different from its modern variants. The relevant Act provided that the employer had to obtain a policy “of insurance or indemnity” for an amount of “at least forty thousand dollars in respect of his liability independently of this Act for any injury to any such worker”.

QBE conceded that it was liable to indemnify in relation to the claim, but asserted that the limit of its liability should be the (then) statutory minimum of $40,000. In the course of the action, QBE had been asked to produce the relevant policy. It had not done so as the policy had been lost.

The unanimous five-member bench of the High Court (consisting of Chief Justice French and Justices Gummow, Hayne, Heydon and Kiefel) held that a distinction had to be drawn, for the purposes of proof, between indemnity and a limitation on indemnity.

The word “indemnity” implied payment for the loss suffered; i.e. the whole loss. While some contracts of indemnity insurance involved a full indemnity, others sought to place a cap or ceiling on the amount payable, which then operated as a limitation on the amount recoverable.

In this case, the policy was a statutory one and (subject to any such limitation), required the insurer to pay the sum awarded by a judgment.

The principles relating to onus of proof required that the estate establish that a policy under the Act was in existence at the relevant time and that Pilkington was liable to the worker. Both those conditions had been satisfied. It followed then that the claim was within the scope of the cover provided.

Those principles then required QBE to do more than simply not admit that Pilkington was entitled to an indemnity greater than the statutory minimum of $40,000. QBE had to establish what limitation, if any, had been placed on its liability to indemnify. It had failed do so, and as a result, the court found no limitation applied.

The lesson for insurers is that, in any matter, they bear the onus of proving exclusions or limitations on the indemnity otherwise provided by the policy. Usually that will be relatively straightforward, as the policy terms will be readily available. In “long-tail” classes however, that may not necessarily be the case. As a result, effective record-keeping is vital in these classes if similar problems are to be avoided.

Starting date clarified

Although it is not a common issue, the question of just when an insurance policy commences can be significant in some cases. A recent decision of the NSW Supreme Court clarifies what needs to be examined to determine when a policy commences.

The insured, Mr Frazer, took out income protection insurance with National Mutual Life. He subsequently suffered from depression and claimed against the policy. His claim was rejected by National Mutual, who relied on several bases to do so, including non-disclosure. Mr Frazer sued on the policy.

At trial before Justice Gzell, an issue arose as to when the policy began. That was significant because of a “waiting period” for cover in the policy.

The sequence of events was that Mr Frazer had completed an application form for the policy by 10 December 2007. On that day, he signed an authority to allow National Mutual to deduct premiums from his credit card. The application form and the authority were lodged with National Mutual on 11 December. A deduction was made on 12 December. Having submitted the application, National Mutual noted that Mr Frazer worked with explosives. They therefore required an “explosives exclusion”. A document (titled “Acceptance of revised terms form”) was prepared to document the exclusion, which showed Mr Frazer as the life insured and policy owner, and included what appeared to be a policy number. The document was signed by Mr Frazer on 21 December.

The policy eventually issued on 11 January 2008.

Justice Gzell noted that there was some authority for the proposition that, in the case of life insurance, any communication before the policy issued were “strongly presumed” to be “preliminary only”. However, the same authority indicated that such a presumption could be overcome.

National Mutual argued that the deduction of the premium on 12 December should not be regarded as significant, as it was for “interim cover” only while the application was being assessed. Justice Gzell rejected that argument, noting that interim cover was provided “without any extra premium”.

However, the mere fact that the payment had been deducted did not necessarily mean that the application had been accepted or that a policy was in force. Logically, that could not be the case as National Mutual had required the “explosives exclusion” after the deduction was made, clearly indicating that cover had not been concluded.

In addition, the notation of a life insured, policy owner and policy number on the exclusion document was similarly not significant, as it merely reflected the insurer’s internal processes.

Finally, the signing of the exclusion document itself was not the conclusion of the policy. National Mutual’s tendering of the document to him was regarded as merely an offer to consider his application if he were to agree to the exclusion.

Accordingly, the policy was not concluded until 11 January 2008, when the policy was issued by National Mutual.

When is an answer “obviously incomplete”

One of the sometimes vexed questions concerning non-disclosure by those seeking insurance is whether the insurer has waived compliance with the duty of disclosure. Such a situation is contemplated by s.21 of the Insurance Contracts Act, although it is unusual for the issue to be litigated. A decision of the Queensland District Court however might provide some guidance.

Mr Allen was a collector of, and dealer in, “classic cars”. He took out a policy with a Lloyds syndicate through an agent for two of his cars. In February 2008, he extended the policy to cover a third car. Three weeks later that car was stolen and found burnt out. He claimed on the policy for the damage to the car.

The insurer admitted that the car had been stolen and that it was a total loss. However it declined to accept the claim on the basis of what it said were either non-disclosures or misrepresentations about Mr Allen’s driving history.

In the proposal form, Mr Allen had indicated that he had only one traffic offence in the preceding 5 years. Asked to provide details of this, he had noted the offence as “exceeding the speed limit” and that he had been the driver. He had stated that the date of the offence and the penalty imposed were “unknown”.

He had verbally advised the agent about the possibility of a second offence, but this was not recorded in the form.

In fact, Mr Allen had 4 speeding offences and one of using a mobile phone while driving during the relevant period.

At the hearing before Judge Clare, Mr Allen agreed that his form gave the impression that he had only one driving offence in the 5 year period; and that was untrue. Evidence from the agent’s employees was also accepted indicating that had his true history been disclosed, cover would have been declined.

He argued however that he was entitled to rely on section 21 (3) of the Insurance Contracts Act. That section provides:

“(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.”

Mr Allen contended that his answer in the proposal about his driving history was an “obviously incomplete answer” that had been accepted, the insurer must be taken to have waived the duty of disclosure.

Judge Clare however noted that an “imperfect recollection” did not necessarily equate to an “incomplete” answer. The information Mr Allen had given the agent about a second offence was a possibility but had not been stated as a fact. Therefore, the fact that the form noted only one offence may or may not have been an error.

Judge Clare found that the term “obviously incomplete” in s.21 (3) must mean something more than a possible omission. As a result, at its highest, the insurer could only be taken to have waived disclosure of the date and fine relating to one of the speeding offences.

It could not however be taken to have waived disclosure of the other infringements. Accordingly, Mr Allen’s failure to disclose his complete driving history was a relevant non-disclosure (and, incidentally, also a misrepresentation).