The long running saga of Prepaid Services Pty Ltd and Atradius Credit Insurance NV appears to have finally run its course in the latest (and quite possibly last) chapter, following the NSW Court of Appeal’s recent decision in Prepaid Services Pty Ltd v Atradius Credit Insurance NV  NSWCA 440.
For a detailed examination of the facts and circumstances of the case please see Carter Newell’s previous article entitled ‘Broad interpretation of section 54 of the Insurance Contracts Act continues’.
On 24 August 2007 the respondent (Atradius) issued the appellants (collectively Optus) with a trade credit insurance policy insuring Optus against the insolvency of Bill Express Ltd (BXP), one of Optus’ largest customers. Following BXP’s entry into voluntary administration, Optus made a claim under the policy. Atradius rejected the claim.
In giving judgment on 7 June 2012, McDougall J (sitting in the Commercial List) held that Atradius was entitled to avoid the policy by reason of Optus’ fraudulent non-disclosure of payment plans that had been entered into between Optus and BXP. Alternatively, if that non-disclosure was not fraudulent, his Honour held that Atradius was entitled to reduce its liability under the policy to nil in accordance with s 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA).
On appeal, the Court of Appeal set aside that decision and remitted the proceedings to the trial judge for a redetermination of whether Atradius was entitled to reduce its liability to nil by reason of what the court found was a non-fraudulent misrepresentation by Optus with respect to the payment plans with BXP.
McDougall J gave judgment on 7 February 2014, concluding that if Optus had made proper disclosures regarding the payment plans in its insurance proposal form, Atradius would not have issued the policy. Accordingly, his Honour held that Atradius’ liability was reduced to nil and it was entitled to judgment on Optus’ claim. In doing so His Honour relied on the evidence given by Mr Magee (Atradius’ senior credit underwriter).
Optus appealed McDougall J’s finding on two grounds, namely:
- Atradius had the onus of proving that it would not have issued a policy at all, but failed to call its employees (Mr Athaide, Mr Choo and members of the Local Credit Committee) who would have played an essential role in any such decision (Ground 1).
- Contrary to the principle in Jones v Dunkel1 the primary judge wrongly inferred, in effect, that the evidence of Mr Magee’s subordinates (Mr Athaide, Mr Choo and the members of the Local Credit Committee) would have assisted Atradius, in that they would have recommended to Mr Magee (Atradius’ ultimate decision-maker) that a policy not be issued (Ground 2).
Decision on appeal
The resolution of Ground 1 required consideration of two issues:
- Whether Optus could discharge its burden by relying on information which may have been available to Atradius at the time; and
- Whether it was necessary for Atradius to call evidence from the subordinates of the ultimate decision maker to discharge its onus under s 28(3) of the ICA that it would not have issued the policy.
It was not disputed that under s 28(3) of the ICA, Atradius had the legal onus of satisfying the court that it would not have issued the policy if the relevant misrepresentation/non-disclosure had not occurred.
Optus sought to discharge its evidentiary burden through the evidence of Mr Naven (Optus’ General Manager of Credit Management) and Mr McQuad (Acting Manager Director of the Optus companies). However it also submitted that there may have been other information available to Atradius, more favourable to Optus’ position that should be considered. Nevertheless, as Meagher JA pointed out in the earlier appeal, Optus also had an evidentiary burden of establishing that it would have provided information to Atradius to attempt to explain the position in relation to the BXP payment plans. In Meagher JA’s view, this evidentiary burden extended to identifying the content of the information that Optus would have provided.
In rejecting Optus’ submission, the court considered that the primary judge was entitled to treat the information that would have been obtained by Atradius as that identified by Mr Naven. It considered that Optus could not reasonably contend that there was, or may have been, other information that Atradius might itself have obtained from BXP (or elsewhere) that might have impacted on its decision. Ultimately, if that information existed it was up to Optus to adduce it.
The court noted that in preparing its case, Optus had the opportunity to obtain from BXP or its former officers such information as might have been relevant. Therefore Atradius was entitled to present its case on the basis of the information that Optus identified. The court concluded:
‘[i]t was not for Atradius to prove a negative, that is, that no such further information would have been forthcoming.’2
Optus also contended that for Atradius to discharge its legal onus, it was necessary to lead evidence not only as to what the outcome of Mr Magee’s deliberations would have been, but also the process by which that outcome would have been achieved. It asserted that this was necessary because Mr Magee gave evidence that he would have taken into account the views of his subordinates. Optus therefore argued that if there would have been any contribution from other people in how Mr Magee reached his conclusion, it was necessary to prove what that input would have been by calling the relevant witnesses.
The court held that Atradius’ calling of Mr Magee as the ultimate decision-maker was sufficient to discharge its legal onus of proof. It further noted that:
‘it does not accord with common sense, nor with the evidence as called, to contemplate that when Mr Magee was fully informed he would allow the views of his subordinates to prevail over his own in circumstances where he was the senior credit underwriter.’3
The court ultimately concluded that:
‘Contrary to Optus’ submission, it was not incumbent upon Atradius to prove each step that would have been taken within its organisation in the hypothetical circumstance that s 28(3) of the [ICA] required to be addressed. Section 28(3) does not specify any particular mode of proof that needs be adopted by the insurer. It is sufficient for it to prove on the balance of probabilities what the outcome would have been in the hypothetical circumstance. Atradius did this.’4
Optus submitted that the primary judge wrongly inferred that the evidence of Mr Magee’s subordinates (who did not give evidence) would have assisted Atradius’ case, whereas he should have inferred, in accordance with the principles stated inJones v Dunkel, that it would not.
The court considered that the primary judge did not assume or infer that the subordinates would have recommended for or against issuing the policy, nor did he draw any positive inference about what their recommendations would be. Rather, consistent with Jones v Dunkel the primary judge proceeded on the basis that their evidence would not have provided positive assistance to Atradius’ case, yet did not infer that their evidence would have been adverse to that case.
Where insurers seek to rely on s 28(3) of the ICA, the decision provides useful guidance on the importance of comprehensive underwriting practices and procedures in the face of challenges to an insurer’s particular position. The fact that in order to discharge its legal onus, adducing evidence from a key decision-maker (rather than all relevant parties who may have assisted in the decision-maker reaching a particular conclusion) will be sufficient for the purposes of s 28(3) of the ICA, should provide comfort for insurers.
The decision also demonstrates the need for insureds to make full and frank disclosures and representations when taking out insurance and the potential pitfalls for insureds in establishing that any misrepresentation would not have affected an insurer’s decision whether to issue the policy.