In this case, Justice McDougall of the New South Wales Supreme Court considered whether, pursuant to s 28(3) of the Insurance Contracts Act1984 (Cth), Atradius Credit Insurance NV (Atradius) was entitled to reduce its liability under the policy to nil, on the basis of non-fraudulent misrepresentation.
His Honour held that on the balance of probabilities, had Atradius been given truthful and complete answers in response to its insurance proposal, it would not have issued the policy and was entitled to reduce its liability to nil.
Atradius issued a trade credit insurance policy in favour of Prepaid Services Pty Limited, Optus Mobile Pty Limited and Virgin Mobile (Australia) Pty Limited (the Insured). The policy insured against the insolvency of one of the Insured’s major debtors, a company known as Bill Express Limited (BXP), and against BXP's failure to pay amounts owing to any of the Insureds. BXP became insolvent and the Insured made a claim under the policy. Atradius argued that, had proper disclosures been made, it would not have issued the policy at all. His Honour noted that it was not submitted that a policy would or might have been issued, but on different terms23.
In 2012, Justice McDougall found24 that Atradius was entitled to avoid the policy by reason of fraudulent misrepresentations pursuant to s 28(2) of the Insurance Contracts Act 1984 (Cth) and that if the representations were not fraudulent, Atradius was entitled to reduce its liability to nil under s 28(3).
However the NSW Court of Appeal25 did not agree and found that the conclusion that there had been a fraudulent misrepresentation must be set aside and remitted the question of whether Atradius was entitled to reduce its liability to nil back to His Honour.
The Application of s 28(3)
Section 28(3) of the Insurance Contracts Act (Cth) operates if an insurer is not entitled to avoid a contract of insurance by reason of a failure to disclose, or a misrepresentation, by the insured. It provides that the liability of the insurer 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 had not occurred or the misrepresentation had not been made26.
“This provision requires an inquiry as to the position the insurer would have been in if the relevant misrepresentation had not been made…..Accordingly, it must establish on the balance of probabilities what it says its position would have been if the misrepresentation had not occurred. That is so notwithstanding that the hypothesis upon which the reduction of liability is based is not an historical fact27”
Justice McDougall was required to consider hypothetical inquiries that would have been made by Atradius had they been provided with full disclosure as to BXP’s financials and the response the Insured would have provided and how Atradius would have dealt with this further information. His Honour noted that the information obtained from these further inquiries would have persuaded Atradius that “BXP was a buyer that Atradius did not want to insure”.
Justice McDougall found in favour of Atradius and accepted that had complete answers been provided in the proposal form, Atradius would not have issued the policy and noted that s 28(3) did not impose an obligation on the insurer to make continued inquiries of the insured in order to discharge its burden of proof.
This decision highlights the importance of making complete and accurate disclosures and representations when entering into a policy of insurance and the difficulties faced in establishing that a misrepresentation would not have altered an insurer’s decision to issue a policy.
It also demonstrates to insurers seeking to rely on this provision the likely considerations of a court in relation to underwriting practices and procedures and in the event that certain non-disclosed material is provided to the insurer what, if any, further inquiries would have been made and responses to such inquiries when determining whether the policy would have been issued.