In the recent case of Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53, the insurer, having made out “actionable” misrepresentation and non-disclosure, was entitled to reduce its liability to nil under s28(3) of the Insurance Contracts Act 1984 (Cth).

Facts

Sagacious Legal Pty Ltd (Sagacious) was a company controlled by Mr O’S, who was also its sole director.  Sagacious owned a car insured by Wesfarmers.  Both Mr O’S and his wife were nominated drivers of the insured vehicle under the insurance policy.  Whilst driving the insured vehicle Mrs O’S was involved in a serious car accident.  A resulting prosecution for the offence of driving whilst there was present in her blood a mid range concentration of alcohol (ie >0.08 and <0.15) was dismissed by the magistrate.

Sagacious made a claim under the insurance policy shortly after the accident.  Wesfarmers denied indemnity on the basis that the policy did not cover instances where the driver was under the influence of drugs or alcohol. There were exclusions in the policy to this effect.  The declinature advice noted that the police report indicated Mrs O’S had a blood alcohol level well in excess of the legal limit.

After the criminal proceedings had concluded, Sagacious filed an application for damages for breach of the contract of insurance.  Sagacious pleaded that it had made all the necessary disclosures and, to the extent it had not, Wesfarmers had waived its right to rely on non-compliance with the duty of disclosure in accordance with s21(3) of the Insurance Contracts Act 1984 (Cth) - where a person either failed to answer or gave an obviously incomplete or irrelevant answer to a question in a proposal form about a matter, the insurer is deemed to have waived compliance with the duty of disclosure in relation to that matter.

First instance

The central issue was whether the relevant disclosures had been made and, to the extent they had not, whether the insurer had waived its right to rely on such non-disclosure. Wesfarmers argued that Sagacious’ misrepresentation and non-disclosure entitled it (Wesfarmers) to reduce its liability to nil under s28(3) of the Act. Under that section, where there has been a breach of the insured’s duty of disclosure under the Insurance Contracts Act, including by a pre-contractual misrepresentation, if an insurer is not entitled to avoid the insurance contract or, being entitled to do so, does not, the insurer’s liability in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure to comply with the duty of disclosure had not occurred or the misrepresentation had not been made. 

The misrepresentation plea centred on Sagacious having filled in a proposal form for insurance which indicated that Mrs O’S had only one driving conviction: for not wearing a seatbelt.  In the form, Sagacious indicated that in the preceding 5 years Mrs O’S had not been charged or convicted in connection with any intoxicating liquor or drug. In fact, she had 2 convictions for driving under the influence. In the alternative, Wesfarmers sought to plead that Sagacious had failed to comply with its duty to disclose under s21 of the Act. 

The trial judge found for Wesfarmers.

Appeal

On appeal Sagacious sought to advance four arguments, each of which was rejected by the Court.  Two arguments were based on the correct construction of the disclosure questions on the proposal form.  Both were rejected.

The third argument put forward by Sagacious was that the answers given on the proposal form were “obviously incomplete” and therefore they could not operate as misrepresentations under s27 of the Act - a person shall not be taken to have made a misrepresentation by reason only that the person failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.  Sagacious further argued that the patent incompleteness of the answers resulted in Wesfarmers having waived compliance with the duty of disclosure by application of s21(3).  The Court found that there was nothing on the face of the answers to indicate that they were incomplete, such that Wesfarmers would be prompted to seek to go beyond the information contained on the proposal form.

Sagacious’ final argument was that there was no misrepresentation because of the operation of s26(1) of the Act.  This section can be invoked in circumstances where a person makes a statement which is in fact untrue, but is made on the basis of an honestly held reasonable belief.  Such an innocent misstatement of events, is not an “actionable” misrepresentation.  The starting point to the analysis was that the statement that there were no further convictions was untrue.  Accordingly, for the section to apply, Mr O’S (as the governing mind of the insured) needed to establish that he had an honestly held belief that there was no need to disclose the further conviction and a reasonable person in the circumstances would have held such a belief.  The Court agreed with the trial judge’s findings as to Mr O’S’s actual state of mind, which precluded a finding that a reasonable person would hold any belief which could form the basis of the untrue statement.

The Court, having found against Sagacious on each of the four bases it advanced, upheld the judgment at first instance.  Consequently, having made out “actionable” misrepresentation and non-disclosure, Wesfarmers’ liability was reduced to nil under s28(3).