Michail v Australian Alliance Insurance Company Ltd  QCA 138
Section 28 of the Insurance Contracts Act 1984 (the Act) limits remedies to insurers where an insured has failed to comply with the duty of disclosure or made a misrepresentation prior to the contract of insurance being entered into to reflect the actual prejudice to the insurer.
Section 28(3) expressly allows an insurer’s liability to be “reduced to the amount that would place the insurer in a position which the insurer would have been in if the failure had not occurred or the misrepresentation had not been made”.
In two recent cases in Queensland and New South Wales the Courts closely scrutinised the insurers’ underwriting guidelines, practices and procedures in making an assessment as to whether they would have issued a policy had they been provided with full and frank disclosure from an insured before the policy was issued. In both cases the insurer’s liability was reduced to nil but not without considerable effort in meeting the Insurer’s onus.
This matter involved a policy of insurance issued by Shannons Limited, which was an agent of Australian Alliance Insurance Company, (the Insurer) to Mr Rodney Michail (the Insured) in respect of the Insured’s Aston Martin (the Policy). The Policy was issued in July 2010. In May 2011 the Insured was involved in an accident that resulted in the Aston Martin being a ‘total loss’1. The Insured subsequently made a claim under his policy.
In investigating the claim it transpired that the Insured had not disclosed his full driving history to the Insured. It was revealed that had the Insured provided full disclosure at the time the Policy was entered into he would have disclosed “at least six offences for which three demerit points were assigned as well as one earlier suspension”2.
The Insurer contended that had the Insured provided this full disclosure that it would not have issued the Policy. The Insurer relied upon its own underwriting guidelines and evidence from its regional manager that the Insured’s full disclosure would have been considered an ‘unacceptable risk’ pursuant to the underwriting guidelines.
The trial judge found in favour of the Insurer and agreed that the Insurer would not have issued the Policy. The Insured appealed to the Court of Appeal arguing that the trial judge erred in finding that the Insurer would not have issued the Policy.
The Court of Appeal unanimously dismissed the Insured’s appeal and found that the Insurer would not have issued the policy had it been provided with complete disclosure and was entitled to reduce its liability to nil by virtue of section 28(3) of the Act.
Her Honour Dalton J (with whom President McMurdo and Gotterson JA agreed) found at paragraph 14 of her reasons:
The appeal ought to be dismissed. The primary judge delivered a careful judgment in which he assessed all the evidence as to what the insurance company would have done had proper disclosure been made. He concluded that in accordance with the guidelines used by the company, the risk of insuring the appellant’s car was unacceptable, and there was no discretion on the facts of this case, to insure the car outside those guidelines. Had proper disclosure been made the respondent would not have accepted the risk. It would have no liability when regard is had to s28(3) of the Act. That finding is well supported by the evidence.
The Court, in its reasoning, placed considerable weight upon:
- the Insurer’s reliance on its own underwriting guidelines; and
- evidence from the Insurer’s regional manager that the Insured’s full disclosure would have been considered an ‘unacceptable risk3’ pursuant to the Insurer’s underwriting guidelines and its practices and procedures in determining whether to insure certain types of risks.
Prepaid Services Pty Ltd v Atradius Credit Insurance NV (No 2)  NSWSC 21
In 2007, Atradius issued a credit insurance policy in favour of Prepaid Services Pty Ltd, Optus Mobile Limited and Virgin Mobile (Australia) Pty Ltd (collectively the Insured). The policy insured against the insolvency of one of the Insured’s major debtors (the Debtor).
Atradius alleged that the Insured had provided false, misleading or incorrect answers in its proposal form in respect of the policy. The alleged misleading answers related to the Debtor and specifically the Insured’s experience in receiving payments from the Debtor and entering into payment plans with the Debtor.
Atradius argued that, had they been provided with full and frank disclosure of the Debtor’s financials, and their payment history with the Insured, they would not have issued the policy at all.
The New South Wales Supreme Court found in favour of the Insurer and agreed that had it been provided with the Insured’s complete and proper disclosure that it would not have issued the policy at all. His Honour McDougal J, at paragraph 133 of his reasons, said:
“… I find, on the balance of probabilities, that if the proposal had given truthful and complete answers in respect of the payment plans, Atradius would not have issued the policy. I repeat that there has been no evidence or submission addressed to the question of whether some alternative policy might have been issued, or on what terms.”
The decision again demonstrated the Court’s willingness to undertake a rigorous evidential enquiry to determine the hypothetical question of what the Insurer would have done in circumstances where the Insured had made complete and proper disclosure. This particular case even involved various international underwriters being flown to New South Wales to give evidence.
Points To Take Away From These Decisions:
Both these decisions should act as a reminder to insureds that it is critical to make complete and proper disclosure when entering into a contract of insurance and to insurers to maintain comprehensive underwriting guidelines, practices and procedures so they are in a position to meet the necessary onus of proving what they would have done had complete and proper disclosure been made on behalf of the insured prior to the policy being issued.