The defendant insurer, Atradius, succeeded in avoiding the policy on the basis of fraudulent non-disclosure by the insured. The case provides useful guidance in relation to the extent of the insured’s duty to disclose, particularly where the insurer is in possession of information which may contradict the insured’s statements. It also indicates what is considered to be “good practice” on the part of the insured: in particular, the insured should carefully review and consider all proposal forms to take the opportunity to ensure they accurately disclose all relevant information.
Atradius issued a trade credit insurance policy in favour of the plaintiffs (Prepaid Services Pty Ltd (PPS), Optus Mobile Limited (Optus) and Virgin Mobile (Australia) Pty Limited (Virgin)). The policy insured the plaintiffs against the failure of Bill Express Limited (BXP) to pay amounts due to any of the plaintiffs. BXP became insolvent and the plaintiffs sought to recover under the policy.
BXP controlled more than 14,000 point of sale terminals. Customers could purchase pre-paid cards through BXP’s terminals which would allow them to access Optus’ or Virgin’s telecommunications networks. When the payment was approved, the customer received a printed receipt, which recorded the information on an e-voucher, which included a personal identification number (PIN). When the customer entered the PIN into their mobile phone, the amount of time for which payment had been made became available.
BXP was frequently late in paying PPS. PPS and Optus ultimately terminated their agreement with BXP, although they continued to supply PINs on the basis that payment would be made on or prior to delivery.
Atradius asserted that the plaintiffs made three misrepresentations in the insurance proposal form, including:
- (in response to a question about the insured’s previous experience with BXP): that BXP had “traded 7-10 days from due date on occasion” (the “Late Payment Statement”);
- (in response to a question as to whether they had ever experienced any difficulties in certification procedures or payment delays in dealing with BXP), the plaintiffs’ answered “Yes – in reducing payment terms from 28 days to 21 days” (the “Payment Terms Statement”); and
- that the plaintiffs had not put the buyer on a payment plan (the “Payment Plan Statement”).
Both parties accepted that the Payment Plan Statement was incorrect. McDougall J held that Atradius was entitled to avoid the policy for fraudulent non-disclosure of the payment plans.
Did the plaintiffs fraudulently make the Statements?
McDougall J found:
- the late trading referred to in the Late Payment Statement:
- marked the outer limits of the extent to which BXP had been late in meeting its payment obligations; and
- indicated that BXP was late only occasionally or infrequently.
The evidence indicated that this answer was clearly incorrect. The plaintiffs’ expert witness’ examination of BXP’s payment history indicated that:
- on average, BXP paid 8.5 days late;
- approximately 70% of BXP’s invoices were paid late;
- about one-third of the late invoices were 11 or more days late;
- of the invoices that fell within the 1 to 10 day range, most were paid 10 days late;
- 55% of all the invoices were paid 10 or more days late.
- there was an “element of ambiguity” in the Payment Terms Statement, as it was unclear whether the reference to “payment terms” was a reference to the contractual terms or the actual terms upon which the parties conducted their business. On balance, McDougall J found that the answer was intended to describe the contractual terms. This answer was incorrect, because there was not, and never had been, 28 day payment terms.
McDougall J found that the plaintiffs’ representative, Mr McQuade, acted recklessly in the way that he checked, printed and signed the proposal form as Mr McQuade:
- had received two drafts of the proposal form before the final version was signed. He made substantial written changes to one of the drafts. This suggested that he should have reviewed the final version carefully, to ensure that it accurately reflected his changes;
- did not follow his usual procedure of checking the draft carefully before he signed it;
- indicated that he paid more attention to matters of form rather than substance. This was not an “appropriate approach to a document that he must have recognised was of importance”;
- was reckless in failing to make proper checks into BXP’s payment history. Mr McQuade knew that the primary purpose for taking out the credit insurance was to provide coverage in the event of default, which was a serious risk in the case of BXP. Accordingly, it was inadequate and inappropriate to answer a question about payment history without undertaking, or causing to be undertaken, detailed investigations into BXP’s payment history;
- was aware that senior officers in the Singtel Group (the plaintiffs are subsidiaries of Singtel Optus) were keen to obtain the insurance cover, and would be extremely displeased if it were not. This may have led Mr McQuade to only undertake a cursory review of the draft proposal.
McDougall J found that the Late Payment Statement and the Payment Plan Statement were made with “reckless indifference to its truth or otherwise”, and were therefore fraudulent. In relation to the Payment Terms Statement, it was sufficiently ambiguous so as to prevent the Court from finding that it was made with reckless indifference to its truth.
As a result of the evidence, McDougall J also found that the plaintiffs fraudulently failed to disclose that:
- BXP was (and for at least two years prior to entry into the policy) consistently unable to pay its debts when they fell due; and
- BXP consistently failed to pay debts on time and frequently had overdue debts exceeding $5 million.
Atradius’ knowledge of BXP’s financial position
The plaintiffs successfully argued that section 21(2)(c) of the Insurance Contracts Act 1984 (Cth) applied to the Late Payment Statement and the Payment Terms Statement. Section 21(2)(c) provides that the insured’s duty of disclosure does not require the disclosure of a matter that the insurer knows, or in the ordinary course of the insurer’s business as an insurer ought to know.
The evidence indicated that Atradius had become aware, well before it wrote the policy, that BXP’s payment history was far different to that indicated in the Late Payment Statement. In particular, Atradius had received a copy of BXP’s management accounts. An analysis of those management accounts would have shown that BXP was trading well over 7 to 10 days late, and the extent of the delays would have indicated that it was unlikely to be happening “on occasion”. In addition, Atradius had information which showed that PPS’ contractual payment terms were 21 days, not 28 days.
McDougall J found that it was irrelevant that the information had not come to the attention to the persons within Atradius who were responsible for deciding whether to issue the policy.
The issue then turns to reliance on the fraudulent non-disclosure of the Payment Plans. McDougall J accepted Atradius’ evidence that it would not have written the policy if it was aware of the Payment Plans, and that this non-disclosure was material to Atradius’ decision to underwrite the risk.
Breach of warranty
The plaintiffs were required, on becoming aware of circumstances that could result in a loss, to take reasonable measures to minimise that loss. For example, the plaintiffs could have terminated the shipment of goods or performance of services under the contract with the buyer. The insurance policy provided that Atradius might agree to the plaintiffs’ acting otherwise. McDougall J held that the plaintiffs breached the warranty. The plaintiffs believed that BXP was insolvent, and must have appreciated that there was a real risk that BXP would not be able to pay for any stock which it sold to consumers after the agreement was terminated. McDougall J held that the “proper and obvious step” in accordance with the terms of the warranty was to require the return of unsold vouchers and to take steps to cancel the PINs if the vouchers were not immediately returned.
Trade credit insurance
The Court had to interpret a trade credit policy drafted from the perspective of goods being traded in a context where BXP’s payment obligation under each contract was not an obligation derived from its position as purchaser. BXP only had an obligation to account in its capacity as agent for the vendor. The case provides a useful analysis of what circumstances under the arrangement were capable of creating insured obligations for the purpose of attracting liability under the policy.
- illustrates that in order to comply with its duty of disclosure, the insured may need to undertake a number of investigations in order to properly respond to queries raised by the insurer;
- provides an indication as to the factual circumstances which are likely to suggest that the insured acted with reckless indifference to the truth or otherwise, so as to amount to fraud; and
- is a timely reminder to insurers of the circumstances where there will not be a non-disclosure under the Insurance Contracts Act.