Thinking | 13 March 2018
Insurable Interest – Issue 45
When you know, you know
The insured’s daughter was involved in a motor vehicle collision, for which she accepted she was liable. At the time of the collision the vehicle was insured by Allianz. The policy has been renewed by the insured’s daughter on her behalf.
Following an investigation, Allianz found that the insured’s driver’s licence had previously been suspended. The insured had failed to disclose the licence suspension upon renewal. Allianz declined to indemnify the daughter (an authorised driver of the insured vehicle) on the basis that it would not have renewed the policy if the licence suspension had been disclosed.
The defendant contested the denial of her claim. Both the insured and her daughter claimed they had no knowledge of the licence suspension.
Hall & Wilcox acted for Allianz in this dispute. At the hearing, Allianz defended the claim principally on the grounds of non-disclosure. Complex circumstances surrounded the question of whether the insured and her daughter knew about the licence suspension. Magistrate Smith ultimately found that while the insured did not know her licence had been suspended, her daughter did.
Despite this finding, Magistrate Smith found that the insured’s daughter did not act as her mother’s agent because she had acted solely in her own interest (as the main driver of the insured vehicle). Given that the daughter’s claim was made as a third party beneficiary under section 48 of the Insurance Contracts Act 1984, Magistrate Smith found that she had no duty of disclosure.
Allianz appealed the decision arguing that, by renewing the policy on the insured’s behalf, the daughter must have been acting as her agent. It followed that she was obliged to disclose the licence suspension. Associate Justice Mukhtar upheld the appeal, finding that Magistrate Smith made an error of law in his conclusion that the daughter was not the insured’s agent.
Associate Justice Mukhtar held that an agent’s knowledge will be imputed to its principal for the purpose of section 21 of the Insurance Contracts Act, which codifies the duty of disclosure. In reaching this conclusion, he noted that it would be illogical to excuse an agent from making a disclosure of a matter which the agent knows is relevant to the insurer’s decision to accept the risk.
|This case confirms that the knowledge of an agent will be imputed to its principal with respect to the principal’s duty of disclosure under section 21 of Insurance Contracts Act 1984, even if the agency relationship is informal and arises in a domestic or family context.|
This article was written by Kate Lawford, Senior Associate.
Builder’s liability claim excluded – considered a ‘professional service’
The owners entered a contract with Metricon Homes to ‘design and construct’ their brand new home and, in June 2008, proudly took possession of the house. Throughout the period January 2011 to May 2014, the house sustained damage arising from defective design and workmanship. In particular, there were significant issues with the house’s concrete slab and timber roof trusses, as well as other defects.
The owners were successful in recovering damages from Metricon. Metricon then made a claim under its products and public liability insurance policy with Great Lakes Insurance (GLI) for rectification costs, defence costs and the settlement sum paid to the owners.
GLI denied indemnity under the policy on the basis that Metricon’s obligation to pay the owners did not arise out of ‘damage to property’ as required by Section 3 of the policy but as a result of Metricon’s failure to construct the house in accordance with its contractual obligations.
The Supreme Court did not like GLI’s argument. It found that when given its ordinary meaning, ‘damage to property’ included damage to the house and therefore the cover applied to cover Metricon’s claim.
However, GLI relied on the ‘professional services exclusion’ (amongst others) and argued that Metricon’s liability to the owners arose out of its failure to render ‘professional services’. The Court found that although Metricon had engaged engineering subcontractors to design the concrete slab and roof trusses (both of which were the principal cause of the damage), the provisions of those designs by Metricon to the owners under the ‘design and construct’ contract constituted a ‘professional service’. Metricon’s claim was therefore ultimately defeated by the operation of the professional services exclusion clause.
|The scope of ‘professional service’ in the context of exclusion clauses continues to be elusive. In this case, the insured must have been disappointed that an insurer, which ran every available argument, succeeded on the basis that, in effect, building a house is a ‘professional service’.|
This article was written by Lauren Handreck, Lawyer.
The rules weren’t made to be broken
There is a little rule in the Magistrates’ Court of South Australia that has been punching above its weight. Rule 61(2) of the Magistrates’ Court (Civil) Rules 2013 (SA) is a procedural requirement that, though once treated as a box ticking exercise, has recently been interpreted as requiring strict compliance.
Last year, the Supreme Court of South Australia handed down judgment in the case of Marmanidis v Germein & Anor. Marmanidis involved a minor civil claim arising out of a motor vehicle accident. In this claim:
- Mr Germein issued a minor civil claim against the negligent driver of another vehicle, seeking the cost of repairing his vehicle. The Registrar served the claim form by post to the given address and service was deemed to have been effected.
- Mr Germein obtained default judgment and then proceeded to enforce it, eventually obtaining a warrant to sell Dr Marmanidis’ property.
- Dr Marmanidis initially buried her head in the sand and the amount being sought from her escalated from $2,335.31 up to $14,768.75 due to costs and interest. Finally, the day before the auction of her property, Dr Marmanidis made an application to the Court, on the basis that she could not recall being involved in the underlying collision and had never been served with legal process.
Ordinarily, and varying slightly depending on jurisdiction, a defendant can set aside a default judgment where they can demonstrate that they have an arguable defence and where they have an explanation for any delay.
Having heard evidence from both sides, the Magistrate found that Dr Marmanidis did not have a reasonable prospect of successfully defending the claim, nor did she have a good explanation for her delay (having been aware of the proceeding for some time, even if she had not received the claim by post). The Magistrate would not set aside the judgment.
Dr Marmanidis applied to the Supreme Court for judicial review of the decision. Of the many grounds argued by Dr Marmanidis, only one was successful. The Supreme Court found that the Magistrates’ Court had made a jurisdictional error. The error was not in the dismissal of the application, but in entering the judgment in the first place. It came to light that Mr Germein had failed to comply with rule 61(2), which requires a party requesting default judgment in those circumstances to prove to the Registrar that, at the same time as the claim was served, a copy of any relevant proof of loss was also served.
Mr Germein did not file anything with the Court to confirm that the proof of loss had been served and therefore the Court did not have the power to enter judgment and the irregular judgment had to be set aside. Even though Dr Marmanidis had no reasonable defence, had unreasonably delayed in responding to the claim and even though the proof of loss and quantum claimed were uncontroversial, strict compliance with the rule was a necessary condition for the Court to have the power to sign the judgment.
|In our experience, the Magistrates’ Court of South Australia is taking this decision very seriously and moving forward, parties must strictly comply with rule 61(2), or face having their judgments set aside (or entry of those judgments refused in the first place).|
This article was written by Christopher Forder, Lawyer
After Mr Sharma’s investment property was destroyed by fire, attention was focused on a mobile phone found at the scene. His insurer denied the claim on the ground that the fire was intentionally lit with Mr Sharma’s consent. In support of its position, the insurer relied almost entirely on mobile phone data which showed that a phone found at the scene had been used to make frequent contact with another phone which was referred to at trial as ‘phone X’. Both the fire scene phone and phone X were prepaid and registered in false names. The fire scene phone contained images of a man with his girlfriend. That man turned out to be the insured’s friend.
Detailed analysis of the calls made by each of the phones, and by two other mobile phones operated by Mr Sharma and his friend, showed that they were using two mobile phones each. It seems they each had a spare phone for nefarious purposes (such as carrying on illicit affairs and planning insurance fraud). At trial, Mr Sharma attempted to maintain the fiction that the two phones did not belong to him and his friend respectively. However, the evidence comfortably established that they did and the trial judge concluded that the fire was intentionally lit by the insured’s friend with the insured’s consent. Mr Sharma appealed.
The New South Wales Court of Appeal applied well established principles for civil cases involving allegations of fraud where the evidence is purely circumstantial. It was noted that in a criminal trial the facts must be such as to exclude any reasonable hypothesis consistent with innocence. By contrast, in a civil trial where fraud is alleged, it is enough if the insurer proves circumstances upon which it is reasonable to find, on the balance of probabilities, in favour of the insurer, even though the conclusion may fall short of certainty.
After considering all the circumstantial evidence arising from the mobile phone data and Mr Sharma’s less-than-satisfactory performance as a witness, the Court of Appeal held that the only reasonable conclusion was that the friend continued to use the fire scene phone until he accidentally left it at the rear of the property after starting the fire and calling Mr Sharma on phone X. The compelling inference in the circumstances was that Mr Sharma consented to the lighting of the fire.
|This case serves as a reminder that the standard of proof in civil fraud cases is still the balance of probabilities, although the evidence relied on by an insurer must be clear and cogent. It also demonstrates that an insurer can succeed in proving fraud, even where the evidence is purely circumstantial, as long as the alleged fraudulent conduct provides the most likely explanation for the established facts.|
This article was written by Matt McDonald, Partner
That’s not fair!
Ever had that sinking feeling that a judge is not giving your case a fair hearing? Or that a judge has made up his or her mind about the case without even hearing the evidence or listening to your submissions? A solicitor who sued for unpaid fees against an unrepresented former client would surely have had that feeling when his case came before Magistrate Smith of the Magistrates’ Court of Victoria.
Magistrate Smith took it upon himself to explain to the solicitor’s counsel why the pleaded cause of action was bound to fail (on grounds which had not been pleaded) and then took it upon himself to rigorously cross-examine the solicitor. The solicitor was understandably dissatisfied with this treatment and appealed to the Victorian Supreme Court. From there he appealed to the Victorian Court of Appeal which held unanimously that Magistrate Smith’s ‘egregious’ conduct involved a substantial denial of procedural fairness and gave rise to apprehended bias. It was also held that Magistrate Smith’s firmly expressed views on the applicable law were wrong. The Court of Appeal noted that it was highly regrettable that the review and appellate jurisdictions of the Supreme Court were invoked, resulting in significant costs and delays, because Magistrate Smith did not act judicially.
On the question of procedural fairness, the Court noted that:
Procedural fairness is directed at the fairness of the decision-making process rather than fairness of outcome, and includes a judicial obligation to afford a party a reasonable opportunity to present or meet a case. Procedural fairness may be denied to a party where a court makes a decision on grounds that were not pleaded or argued and without giving the party adversely affected a reasonable opportunity to give evidence and make submissions on those grounds.
The test for finding of apprehended bias by the Court was as follows:
The appearance of impartial justice would be compromised if the words or actions of a judge conveyed the impression that he or she had preconceived adverse views about a party’s case and that those views were so strongly held that the judge was unwilling or unable to consider on their merits any submissions made, or evidence adduced, by that party which were inconsistent with those views. However, the expression of tentative views during the course of argument as to matters on which the parties are permitted to make full submissions does not manifest partiality or bias.
|This decision provides useful reminder that there are limits to judicial interference in the conduct of legal proceedings and that judicial officers should be careful not to conduct themselves in an unjudicial manner.|
This article was written by Matt McDonald, Partner
A prospective purchaser of a house in Bulli, NSW engaged the insured to undertake an inspection of the property. The resulting report described a timber balustrade on a balcony to be secure and in fair condition.
However six months later one of the balusters gave way when the owner’s daughter and her friend were playing on the balcony. The daughter fell 2.5 metres onto the pavement and lost consciousness.
Both the owner and her daughter brought claims against the insured alleging post-traumatic stress disorder from witnessing the accident and its aftermath. The insured was found to be liable for failing to notice obvious corrosion of the screw restraining the baluster.
The insured had both public liability and professional indemnity cover with the same insurer. The insured business was essentially described as ‘building inspections’. There was an extensive endorsement entitled ‘Building Inspection Endorsement’. So having issued cover tailored for a building inspector to a building inspector, you would expect the insurer to cover the claims. Not so.
The insurer argued that there was no cover under public liability because of an exclusion in respect of the provision of any professional advice or services, or advice given for a fee in carrying out any Business Activity. The insurer argued that the building inspection report constituted professional advice. In relation to the professional indemnity cover, the insurer relied on an exclusion in respect of personal injury claims.
The endorsement was important. It specifically stated that the insured’s Business Activities included pre‑purchase building inspections, subject to certain conditions, one of which required that inspection reports be computer‑generated and sent to the customer and another one of which required that if any external timber structures were observed the ensuing report must recommend certain inspections and precautions.
The NSW Court of Appeal noted the conflict between the endorsement, which specifically incorporated inspections in the definition of Business Activities and which specifically required provision of inspection reports, and the exclusion in respect of advice given for a fee in carrying out any Business Activities. The Court resolved that conflict by finding that the exclusion did not apply to advice given in the course of the defined Business Activities of the insured. The Court placed reliance on a provision in the policy which stated that where a specific condition, exclusion or definition was in conflict with a general condition, exclusion or definition, then the specific one would apply.
The Court was clearly conscious that the consequence of the insurer’s arguments was that the insured was caught between two stools, covered neither by public liability nor professional indemnity. The leading judge noted:
Not lightly would I conclude that, as a matter of construction, the policy documents did not respond to that class of claims. From the perspective of an insured, the possibility of liability for personal injury or property damage was a central component of the risk against which insurance has been taken. Indeed, the obligation in the endorsement to recommend ‘if people are likely to use the External Timber Structure, that care is taken not to overload the External Timber Structure’ illustrates not only that personal injury damage was regarded as central to the risk, but also that the risk extended to personal injury occurring as a result of the advice.
|It was not surprising that an insured who had taken out both public and professional liability cover in respect of both his practical and advisory business activities would be covered for a claim arising out of those activities. The Court had regard to the purpose of the cover but was able to find the answer in the policy wording, and in that respect the endorsement concerning the extended definition of Business Activities was critical.|
This article was written by Andrew Lyle, Partner
The proof is in the policy
On 25 January 2016, an insured was involved in a motor vehicle collision with the appellant in Fawkner, Victoria. The appellant claimed his cost of repairs from the insured, whose insurer admitted liability and paid the cost of repairs three months after the accident.
The appellant was a university student who used his car to attend university and for social and work purposes. In the four months after the collision and before he received payment from the insurer, the appellant hired a vehicle at a cost of $115 per day. The appellant stopped renting the vehicle almost as soon as the insurer paid him. However, by that stage, the appellant had accrued a debt of $14,030.
The appellant sued the insured to recover that amount. The insurer admitted liability but alleged that the appellant had failed to mitigate his loss by failing to make a claim on an ‘applicable insurance policy’ in respect of his vehicle, which would have enabled him to purchase a replacement vehicle as soon as practicable.
The appellant gave evidence that his vehicle was insured but that his mother had taken out the policy and she paid the premiums. He also gave evidence that his mother would not let him make a claim on the policy because they were estranged.
A bundle of policy documents was admitted into evidence. The documents made no reference to the appellant. More importantly, the documents stated that the policy commenced approximately three months after the collision. While it was apparent from the documents that there was a prior insurance policy that would have been in place at the time of the collision, there was no evidence as to what were the terms and conditions constituted of such policy.
The Magistrates’ Court found in favour of the insurer on the basis that the appellant was obliged to make enquiries through his mother which would have led to a successful claim being made. Accordingly, he would have been able to obtain a payout and use the proceeds to purchase a replacement vehicle in mitigation of his loss.
On appeal, the Supreme Court held that the Magistrate’s findings were dependent on first finding that the appellant was legally entitled to make a claim on his mother’s policy. In this case, there was no evidence of an applicable policy in respect of the appellant’s vehicle as at the date of the loss and therefore it was not arguable that the appellant had an obligation to make a claim on an insurance company. Consequently, the Supreme Court determined that the insurer failed to discharge the onus of proving the existence of an ‘applicable policy’ and the appeal was upheld.
|When seeking to establish the existence of an insurance policy, close enough is not good enough. The full terms of the policy, including the applicable policy schedule should be available to the Court so that a decision may be made on the evidence, rather than assumptions about what evidence might exist.|
This article was written by Jessica Dickson, Lawyer
The end of expert bootstrapping in Queensland
This decision marks an important change in mood in how hearsay evidence in documents is dealt with in Queensland, overturning a longstanding practice of admission by default.
The plaintiff brought a claim against his employer for a back injury from opening the door of his truck. The plaintiff failed at trial on the basis that there was no breach of duty. The plaintiff’s focus on appeal was the question of whether the plaintiff received appropriate manual handling training. However, manual handling training had not been an issue at trial and the plaintiff had not given evidence about training. In order to overcome this deficiency in the evidence, the plaintiff relied upon the report of the plaintiff’s ergonomic expert who had recorded the plaintiff’s statement to him that there was no training.
The plaintiff relied upon a 2012 Queensland Court of Appeal decision which stated that it was a long-established principle in Queensland that if a party failed to object to a document containing hearsay evidence, that evidence would become admissible.
The 2017 Court of Appeal categorically rejected this principle, at least insofar as it related to expert reports. Expert reports were a ‘special and different category’ because of the proof of assumption rule. Experts were required to make assumptions of fact for the purposes of formulating their opinions. However, such assumptions must ultimately be proved by direct evidence at trial. The opposing party could not object to the expert reports on the grounds of the hearsay assumptions but this was not to be taken as an admission of hearsay evidence.
To hold otherwise would allow a party to effectively ‘bootstrap’ their case by tendering an expert report without calling the witnesses (including the plaintiff) to substantiate the assumptions. This could be performed deliberately to avoid exposing those witnesses to challenge on cross-examination and would be tantamount to misleading the court.
The Court could find no evidence of a ‘longstanding practice’ in Queensland of allowing otherwise inadmissible hearsay evidence in through documents and suggested that the grounds for objection applied equally applicable to non-expert documents. The Court considered previous cases which had applied the principle and suggested the results may be different now.
|This decision will have an important impact on trial preparation in Queensland as it had been the practice for plaintiffs to rely upon assumptions in experts’ reports to backfill the gaps in a plaintiff’s evidence. This decision reinstates the correct practice of a more vigorous testing on the basis of the expert’s assumptions and stopping the ‘bootstrapping’ of plaintiffs’ cases.|
This article was written by Sean Sullivan, Special Counsel
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