Insurance Quarterly newsletter

Norton Rose Fulbright starts 2016 with a look back at some of the key insurance decisions and developments from the past year in our Australian Insurance Update. We start with some Western Australian decisions looking at exclusion clauses, excess liability insurance and reasonable precaution conditions in liability policies. We then consider a Queensland decision considering the construction of a policy regarding a flood claim. Our Melbourne office considers the Federal government response to the recommendations of the Financial System Inquiry and the insurance industry’s reaction to it.

Our New South Wales office considers statutory construction issues regarding the Insurance Contracts Act in Lambert Leasing v QBE. Recent experience of our Melbourne office in life insurance claims produces a review of the decision of Westpac v Guirgis in respect to the basic requirements an insurer must meet before avoiding a life policy. From Melbourne again we consider the role and duties of executive and non-executive directors as it relates to policy coverage for an investment management insurance policy. From Queensland we consider a decision relevant to the statutory insurance scheme for the building industry and the Queensland Building and Construction Commission. We review the NSW decision of HIH v QBE which looks at the operation of s 562A of the Corporations Act 2001 (Cth) and the application of monies received by a liquidator. Finally, we consider a decision of the Victorian Civil and Administrative Tribunal in regard to discrimination relating to a mental health exclusion in a travel insurance policy.

We hope you will enjoy our review on this diverse range of topics from the vibrant Australian insurance market.

• Home and contents cover, breach of duty as owner or occupier; Austin V Verini [2015] WASC 258
• Excess liability insurance, construction of excess policy wording; The Hancock Family Memorial Foundation Ltd v Lowe [2015] WASCA 38
• Policy requirement to take all reasonable precautions, birthday party leads to workplace injury; Canny v Primepower Engineering Pty Ltd v Allianz Australia Insurance Ltd [2015] WADC 81
• Flood damages at trade show, policy construction; Cruise Oz Pty Ltd v AAI [2015] QSC 215.
• Government support for financial system reform; Article on the Financial Systems Inquiry
• Other insurance clauses and the Insurance Contracts Act; Lambert Leasing Inc & Anor v QBE Insurance & Ors [2015] NSWSC 750
• Avoiding a Life Insurance policy, fraudulent non disclosure; Westpac Life Insurance Services Limited v Therez Guirgis [2015] VSCA 239
• The role and duties of non-executive directors; AIG Australia Ltd v Jacques [2014] VSCA 332
• Challenging the decisions of the Queensland Building and Construction Commission; Samimi & Anor v Queensland Building and Constructions Commission [2015 QCA 106.
• Monies received by liquidator under s 562A of the Corporations; HIH Casualty & General Insurance Limited [2015] NSWSC 923
• Mental health exclusion in policy of travel insurance – infringement of civil and political rights; Ella Ingram v QBE Insurance (Australia) Ltd VCAT no H107/2014 (18 December 2015)

By Jehan-Philippe Wood and Karen Francis

Insurance – house contents insurance – liability of owner builder – coverage – exclusion for liability arising out of breach of duty as owner or occupier – court found claim was for breach of duty arising out building the house and that duty was independent of whether builder the owner or occupier – insurer liable to indemnify the insured 

This decision highlights the need to carefully construe exclusion clauses and assess how they apply on the given facts.

Background:

Between 1993 and 1996, the first defendant constructed a home as an owner builder and subcontracted the construction of the home’s balcony to a carpenter. The balcony was not constructed in accordance with the plans approved by the local council and the defendant did not refer the change to the designer or certifying engineer for consideration. The first defendant transferred the property to new owners in 1996, and the property was subsequently transferred on two further occasions. In 2009, the owners held a party attended by the plaintiffs who were standing on the balcony when it collapsed and were injured. On the basis of agreed facts and admissions, the court entered judgment for the plaintiffs. The only contested issue was the liability of the insurer, who was joined to the proceedings, to indemnify the first defendant.

Wesfarmers Insurance did not insure the house at the time of the accident. However, it had issued a home and contents policy to the first defendant which included cover for him and his family against legal liability to pay compensation for personal injury and property damage directly caused by an occurrence during the period of insurance. There was no dispute that the plaintiffs’ claim fell within the scope of this cover. However, Wesfarmer relied on an exclusion clause which provided that the policy did not insure the first defendant against any liability for personal injury directly or indirectly caused by or arising out of a “breach of your duty as the owner or occupier of a building or structure we did not insure at the time of the occurrence that caused the personal injury.” Wesfarmers submitted that the duty arose out of the defendant’s ownership of the building: the defendant was not a registered builder, was not qualified to be a registered builder, and was only issued a building licence on the basis that it related to a building he proposed to construct for himself.

Decision:

Allanson J held that while at various times the defendant may have owed duties of care to others arising out of his ownership of the property, the issue in this case was the nature of his duty to the plaintiffs and ownership was not a necessary part of that duty. Rather, the duty arose out of the activity that the defendant undertook in building the house and was independent of whether the defendant was, at the time, the owner or occupier of the house.

By Jehan-Philippe Wood and Rachel Pearce

Insurance – excess liability insurance – construction of excess policy wordings – action brought against excess policy insurers under s51(1) of the Insurance Contracts Act 1984

This is an important decision concerning the construction of excess policy wordings. The courts will look closely at the conditions precedent to a grant of indemnity under an excess policy, which conditions will vary from contract to contract. This is a unique case given that the policy was provided under a legislative scheme.

Background

From 1972, Mr Fieldhouse provided legal services to Lang Hancock and companies under Mr Hancock’s control, including Hancock Prospecting and the Hancock Family Memorial Foundation (Foundation). In 1991, Mr Hancock sold his share in Hancock Prospecting to the Foundation for $20 million. Mr Fieldhouse acted for Mr Hancock on the sale. In 1995 the Foundation commenced proceedings against Mr Fieldhouse claiming that Mr Fieldhouse acted for both Mr Hancock and the Foundation in the sale and Mr Fieldhouse breached his contractual and tortious duties to the Foundation in failing to advise that the share was worthless or of nominal value, or in failing to advise the directors of the Foundation to get independent legal and accounting advice. The Foundation sought damages of $20 million.

Under the Legal Profession Act 1987 NSW, Mr Fieldhouse was required to hold professional indemnity insurance approved by the Attorney General. He was also required to contribute to the Solicitors Mutual Indemnity Fund (Fund) established by the Legal Practitioners Act 1898 (NSW) and administered by LawCover. In addition, Mr Fieldhouse held $10 million top up cover provided by Lloyd’s Syndicates for any liability that exceeded his indemnity from his primary insurance.

Mr Fieldhouse was insured under a Master Policy with HIH, FAI, GIO and Sun Alliance entered into by the Law Society on behalf of insurable solicitors. Under the Master Policy, claims of up to $1.1 million are met by the insurers when the aggregate amount of claims for the year exceeds $58 million. That aggregate was not met and therefore Mr Fielding had to look to the Fund to indemnify him in respect of the first $1.1 million of the claim against him, and to the Lloyd’s policy for any excess, up to $10 million. LawCover granted indemnity to Mr Fieldhouse and notified the Foundation of that indemnity in a letter dated 4 June 2008. LawCover did not admit that Mr Fieldhouse was liable to the Foundation but instead defended the claim.

Mr Fieldhouse died intestate in November 2007. The Foundation’s causes of action against Mr Fieldhouse terminated at common law but survived against his estate under s4(1) of the Law Reform (Miscellaneous Provisions Act 1941 (WA). The Foundation sought and was granted an order under s51 of the Insurance Contracts Act 1984 (Cth) joining representatives of the Lloyd’s Syndicates as defendants. Section 51 permits a claimant to sue an insurer directly where the insured has died. There had been no payment from the Fund of the full amount of any indemnity payable to Mr Fieldhouse, and in the absence of any judgment against Mr Fieldhouse’s estate or LawCover, there would be no such payment in the future. The parties agreed that the insurers under the Master Policy are Underlying Insurers. The parties did not challenge the finding of the trial judge that the Fund is also an Underlying Insurer.

The Lloyd’s Syndicates relied on Condition C in the policy schedule, which provides:

Underwriters shall only be liable in respect of the indemnity herein given after the Underlying Insurers have paid or have admitted liability or have been held liable to pay the full amount of their indemnity provided always that the liability of Underwriters under the indemnity herein given shall be limited to the amount payable in respect of each and every claim in the period of insurance stated in the Schedule. It is a condition of this Policy that the Underlying Insurances shall be maintained in full effect during the currency of this Policy.

The trial judge found there were three alternative conditions in Condition C and that it was a condition precedent to the obligation to indemnify under the Lloyd’s policies that at least one of the three specified conditions be met:

1. The Underlying Insurers have paid the full amount of the indemnity;
2. The Underlying Insurers have admitted liability to pay the full amount of the indemnity;
3. The Underlying Insurers have been held liable to pay the full amount of the indemnity.

The Foundation argued that condition 2 of Condition C was satisfied because LawCover admitted liability to indemnify Mr Fieldhouse. The trial judge found that on the proper construction of the policy that condition was not satisfied. The trial judge also held that the third condition was not satisfied, as the words ‘have been held liable’ mean ‘have been determined by a court to be liable’, which could not happen because neither LawCover nor Mr Fieldhouse’s estate were before the court.

The Foundation appealed, arguing that the trial judge erred in his construction of Condition C. The Foundation also argued that if Condition C could not be satisfied because neither Mr Fieldhouse nor LawCover were parties to the proceeding, then Condition C is void under s52 of the Act because it permits the contracting out of s51.

Decision:

The Court of Appeal held:

1. the purpose of Condition C was to make the existence of the liability to indemnify under the Lloyd’s policies conditional upon Mr Fieldhouse establishing both the fact and the amount of the Fund’s liability to indemnify Mr Fieldhouse’s liability for the loss which was the subject of the claim by the Foundation;

2. by its grant of indemnity, LawCover did not admit that Mr Fieldhouse was liable to the Foundation for its loss (in fact it hotly contested the claim), only that the loss was a kind covered by the policy;

3. condition 2 of Condition C required the Underlying Insurers, including the Fund, to have admitted both the fact and the full extent ($1.1 million) of Mr Fieldhouse’s liability to the Foundation, which they had not done;

4. the trial judge’s construction of condition 3 of Condition C was correct: as LawCover and the estate were not parties to the proceedings, any determination of liability would not be binding, and to read down the condition so that it would only be necessary to make a determination of liability binding against the Lloyd’s Syndicates would reverse the intended relationship between the primary and excess insurers;

5. as none of the three preconditions to Condition C was satisfied, the Foundation could not rely on s51 of the ICA to recover against the Lloyd’s Syndicates; and

6. Condition C did not, by its terms or its operation, exclude, restrict or modify s51 of the Act. S51 had no application to the Fund, the NSW Law Society or LawCover, but that was a consequence of the scope of s51, not of Condition C. Condition C went to the heart of the nature of an excess liability policy and it could not have been the intention of the legislature in enacting s51 to fundamentally alter the nature of the contractual relationship between an insured and his excess insurers in the event the insured died.

By Jehan-Philippe Wood and Karen Francis

Insurance – Employers’ Indemnity Insurance – Conditions – Requirement to take all reasonable precautions to prevent injury to workers – Whether the insured perceived and deliberately courted the risk

In this case, the employer’s indemnity insurer successfully relied on a ‘reasonable precautions’ provision to deny the employer’s claim for indemnity in respect of the employer’s liability to an injured employee.

Facts:

On November 11, 2011, work finished at Primepower at 11.00 am in celebration of the managing director’s birthday. The theme of the work function was “eleven” and the managing director, Peter Allen, organised a barbecue and 11 kegs of beer for staff, apprentices and friends of the business.

Throughout the afternoon, apprentices attempted to start and then ‘seize’ a disused 4-stroke diesel engine. The apprentices took the engine to the workshop and got it to run. They then moved the engine to a wash bay area, about 20m away from the bar area of the social function. The apprentices sought advice from Primepower staff about how to get the engine to run faster and seize, and they sprayed a number of different substances into the intake of the engine, including brake fluid and paint thinner. Guests in the bar area could hear but not see the engine stop and start on a number of occasions.

The plaintiff, an employee, took part in the activities to seize the engine. He had been drinking. At about 7 pm an unidentified person brought around a jerry can of petrol. The plaintiff and another apprentice were near the engine at the time and attempted to start the engine with the petrol. A fireball came from the engine and the plaintiff was engulfed in flames, suffering serious burns to 60% of his body.

The plaintiff issued proceedings against Primepower alleging negligence and breach of a statutory duty. Primepower denied liability and in the alternative pleaded contributory negligence against the plaintiff. It also issued third party proceedings against Allianz, who had denied liability to indemnify Primepower, relying on a ‘reasonable precautions’ clause in its Employers’ Indemnity Policy.

Decision:

The court held that Primepower breached its duty to the plaintiff in failing to provide a safe place of work and a safe system of work. The court assessed the plaintiff’s degree of contributory negligence at 15%. These findings were not controversial.

The court also held that the managing director, Mr Allen, had recognised a danger and deliberately courted it, such that Primepower did not comply with the reasonable precautions clause of the policy and was not entitled to indemnity from Allianz. In particular, the court held that Mr Allen:

• was indifferent to what substances were being used by the apprentices to seize the engine;
• had a relaxed attitude towards alcohol in the workplace;
• encouraged unsupervised apprentices who consumed alcohol to work on the engine;
• allowed intoxicated supervisors to give advice to the apprentices;
• knew the apprentices were drinking and deliberately allowed the consumption of alcohol (this was not one beer consumed after work but free flowing alcohol over a long period of time); and
• took no steps to protect the apprentices who were working on the engine.

As a result, Primepower was left uninsured for liability for the losses suffered by the plaintiff. Although the court was not required to decide quantum, the sum would likely have been significant given the extent of the employee’s injuries.

By Louise Hazelton, and Daniel Troy

Contractual interpretation – insurance contracts – defined terms – bolded terms defined to have special meaning – where term appears unbolded, it is to be interpreted in accordance with natural and ordinary meaning In the recent decision of Cruise Oz Pty Ltd v AAI Ltd,¹Justice Carmody of the Supreme Court of Queensland considered whether an insurance agreement covered flood damage sustained at a trade show. In resolving this dispute, His Honour considered:

1. whether showgrounds constitute “your premises” for the purposes of the exclusion clause under section 3 of the agreement; and
2. the process for determining the “most favourable clause” where a “Two Section Exclusion Clause” in the agreement prescribed that, where two or more insuring clauses might respond to the relevant claim, the most favourable clause will apply.

This decision provides a cautionary illustration that, where an insurance agreement defines bold terms to have a specific or technical meaning, it will be difficult to establish that unbolded terms should not be interpreted in accordance with their natural and ordinary meaning.

Background facts

Cruise Oz Pty Ltd (the applicant) and Vero Insurance (the respondent), entered into an insurance agreement on 12 June 2013. On 26 and 27 March 2014 the applicant exhibited 15 caravans at the Mudgeeraba Showgrounds for a trade show. On 27 March, part of the showgrounds were submerged during significant rain causing substantial damage to 3 vehicles, and causing the other 12 to be written off. The respondent in large part, declined the claims under both s 1(A) and s 3 of the agreement. The responded submitted that the claim under s 3 should be rejected on the basis of the definition of “your premises,” and because s 1(A) was the more favourable claim under the Two Section Exclusion Clause, s 3 could not apply.

The decision on appeal

The correct meaning of “your premises”

The term “your premises” was defined in the definitional schedule to the policy in broad terms that would extend the exclusion of cover to the vehicles while situated at the showgrounds. However, the interpretative clause of the policy prescribed that all words in bold had the definition prescribed in the definitional schedule. “Your premises” was not bolded in the relevant paragraph of the policy and in the absence of that, Carmody J “inferred that any words which are not in bold do not possess a special defined meaning”. He concluded that “your premises” ought be afforded its natural and ordinary meaning which would not extend to the showgrounds: [27].

The respondent argued that the failure to bold “your premises” was a mistake. This argument was rejected by the Court on the basis that there was insufficient evidence there was no unconscionable conduct by the applicant which would justify fundamentally modifying the agreement for a unilateral mistake, and using the natural meaning did not make the agreement uncommercial or inequitable: [28]-[29].

The Court held that the natural and ordinary meaning of “your premises” includes at least a stable, durable and continuous occupation of a building or part of a building that houses a business. Therefore the trade show was not within the natural and ordinary meaning of “your premises.” The respondent was unsuccessful in arguing that such an interpretation was uncommercial, or that “your premises” should be interpreted in the same way in both s 1(A) and s 3, or that premises could be construed to include a trade show: [35]-[38].

The “Two Section Exclusion Clause”

The most favourable clause for an insurance claim should be determined with reference to the nature and circumstances of the claim: [46]-47]. A clause that allows some recovery is much more favourable than a clause that permits a large recovery but is excluded in the circumstances by an exclusion clause: [47]. Section 1(A) could not be considered the more favourable clause as the flood damage exclusion clause made it unlikely to succeed. Moreover, the two section exclusion clause is only relevant where two sections apply, and in this circumstance only s 3 applies: [48].

The Court also held that the part payments made under s 1(A) do not preclude the applicant from claiming under the more favourable clause of s 3: [52].

Implications for the interpretation of insurance contracts

In an insurance document where only bolded terms are defined to have a specific or technical meaning, it will be difficult to establish that unbolded terms should not be given their natural and ordinary meaning. Evidence of the insurer’s subjective intention to the contrary may not be sufficient to show a common intention of the parties.

By Matthew Ellis

Public policy – financial services regulation – final report of Financial System Inquiry – impact on insurance industry

The Federal Government’s long-awaited response to the final report of the Financial System Inquiry (FSI) was released on 19 October 2015. The ministerial reshuffle brought about by Malcolm Turnbull’s appointment as Prime Minister delayed the release of the response; but the newly appointed Treasurer, Scott Morrison, and the Assistant Treasurer, Kelly O’Dwyer, did not veer from the expected course. The Government has backed all but one of the FSI’s 44 recommendations across five distinct strategic priorities, namely:

1. The resilience measures, which are aimed at reducing the impact of potential future financial crises by ensuring Australia is better equipped to weather them and lessen their cost to taxpayers and the economy.
2. The superannuation and retirement incomes measures, which are aimed at reducing the costs of the superannuation system to consumers.
3. The innovation measures, which are aimed at unlocking new sources of finance for the wider economy and supporting competition and the facilitation of technology-led innovation.
4. The consumer outcomes, which are aimed at providing consumers with confidence to participate in the financial system and confidence that they are being treated fairly.
5. The regulatory system measures, which are aimed at making regulators more accountable for their performance, more capable and more effective.

For the insurance industry, the Government’s endorsement of the FSI’s recommendations will ultimately lead to some significant changes to regulation, particularly in the areas of consumer outcomes and innovation.

Consumer outcomes

In the area of consumer outcomes, the Government has agreed to:

• create a targeted and principles-based financial product design and distribution obligation. This will see organisations taking greater responsibility for ensuring that products are only designed for, and sold to, customers for whom the product is appropriate;
• provide ASIC with a product intervention power to enable it to modify, or if necessary, ban harmful financial products where there is a risk of significant consumer detriment. These powers are proposed to be based on similar powers granted to the UK’s Financial Conduct Authority in 2012;
• remove regulatory impediments to innovative product disclosure;
• develop legislative amendments to raise the professional, ethical and educational standards of financial advisers by requiring advisers to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year;
• support industry-led initiatives to increase guidance and disclosure in general insurance;
• take steps to more clearly differentiate financial products. The Government has given its support to APRA in improving product differentiation for retail consumers; and
• rename ‘general advice’ to improve consumer understanding. The Government will consult with a wide range of stakeholders and conduct consumer testing before finalising the name of the new term.

Innovation

In the area of innovation, the Government has agreed to:

· establish a permanent public-private sector collaborative committee (the Innovation Collaboration Committee) to facilitate financial system innovation. The committee will be linked to ASIC’s Digital Finance Advisory Committee;

· improve the use of data. The Government proposes to task the Productivity Commission with reviewing options to improve accessibility to data, taking into account privacy concerns and other existing Government processes; and

· amend priority areas of legislation and regulation to be technology neutral so as to prevent technology-specific laws and regulations from impeding innovation.

Where to from here?

2016 will see Treasury embark on a range of consultations with stakeholders in respect of the recommendations. Implementation of any changes to financial services regulation is not likely to be seen before January 2017. There will be a Federal election before then (possibly early in 2016) which may disrupt this process.

Insurance industry reaction

The insurance industry has so far reacted positively to the Government’s response. The Insurance Council of Australia has stated that general insurers are “pleased” with the response, but that further detailed consultation is required to address the extent to which the recommendations should apply to the insurance industry, as opposed to the banks and superannuation funds to which they appear more relevant. However, given global regulatory trends in these areas, particularly around product governance and intervention powers, the expectation is that any changes to financial services regulation will apply equally to insurance issuers and distributors.

By Ray Giblett and Miles Lee

Lambert Leasing Inc and Another v QBE Insurance Ltd and Others [2015] NSWSC 750

Insurance Contracts Act 1984 – scope and application of s 45(1) “Other insurance” provisions – whether s 45(1) renders void ‘other insurance’ clause – court finds s 45(1) requires relevant insured to be the party who contracted with the insurer on whom claim is made and who is also a party to the second policy

• The New South Wales Supreme Court considered whether an ‘other insurance’ clause was rendered void by section 45(1) of the Insurance Contracts Act 1984 (Cth) (ICA). The Court also considered when an insured relevantly “entered into” a contract of insurance by the application of section 45(1) of the ICA.
• In finding that the other insurance clause was not rendered void by section 45(1) of the ICA the Court applied Zurich Australia Insurance Ltd v Metals & Minerals Insurance Pte Ltd² (Zurich) and followed ABN AMRO Bank NV and Others v Bathurst Regional Council and Others³ (ABN AMRO) in a narrow reading of the statute, restricting the applicability of section 45(1) of the ICA to cases where an insured is a party to both the first and second contract of insurance. Further, the Court held that a person named as an insured under a contract of insurance is not by that mere fact a party to and does not necessarily thereby “enter into” a contract of insurance for the purposes of section 45(1) of the ICA.

An abundance of insurance

In 2003, the second and third defendants Jalgrid Pty Ltd and Dramatic Investments Pty Ltd (together the Partnership) purchased a Fairchild Metro 23 aircraft (Aircraft) from the first plaintiff Lambert Leasing Inc (Lambert) under an Aircraft Purchase Agreement dated 9 May 2003 (Purchase Agreement). The Aircraft was then leased by the Partnership to Lessbrook Pty Ltd (Lessbrook) under a Hire Lease Agreement dated 17 June 2003.

Under clauses 7.01 and 7.02 of the Purchase Agreement, the Partnership was required to maintain aircraft liability insurance for a period of two years from the date of execution covering Lambert and related companies (including the second plaintiff Saab Aircraft Leasing Inc (SAL)), and to indemnify Lambert in respect of any future claims resulting from the partnership’s use or operation of the Aircraft.

Under the Purchase Agreement, Lessbrook entered into an insurance policy with the first defendant QBE Insurance Ltd (QBE) which named Lambert and SAL as “Additional Insureds” (QBE Policy). Lambert and SAL were also insured through their parent company SAAB A B, a Swedish company (SAAB). SAAB held an insurance policy with Global Aerospace Underwriting Mangers Limited (Global) in which Lambert and SAL were insured as subsidiaries of SAAB (Global Policy).

On 7 May 2005 the Aircraft crashed during a flight from Barnaga to Cairns killing all 13 passengers on board and the Aircraft’s two pilots. Proceedings were brought in the United States by relatives of the deceased against Lambert and SAL and the Partnership, among others (US Proceedings). Lambert and SAL made a claim under the Global Policy for indemnity in respect of the costs of defending the US Proceedings and for any damages Lambert and SAL may become liable to pay, following which in 2007, Global took on the defence of the US Proceedings and paid all the costs incurred in its defence. In 2008, Lambert, at the instigation of Global, sought indemnity from QBE under both the QBE Policy and the Purchase Agreement, which was refused by QBE.

In refusing indemnity, QBE sought to rely on an ‘other insurance’ clause in the QBE Policy. Relevantly, clause 9 of the QBE Policy stated:

9. If any claim under this Policy is also covered in whole or in part by another policy or would but for the existence of this Policy be covered by another policy, except to the extent that the amount of any liability exceeds the amount payable under such other policy or policies, provided always that the Insurers shall not be liable to pay any amount in excess of any relevant amount specified in the Schedule.⁴

In reply, Lambert argued that that the clause was rendered void by section 45(1) of the ICA, which states “where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance…the provision is void”⁵ (emphasis added). In the course of their submissions to the Court, Lambert and SAL argued that they were parties to each of the QBE Policy and the Global Policy.

What was the effect of the ‘other insurance’ clause?

Rein J closely considered the interpretation of “entered into” in section 45(1) of the ICA. In construing the meaning of those words, His Honour declined to follow Nicholas v Wesfarmers Curragh Pty Ltd & Ors (Curragh)where McMeekin J stated that section 45(1) did not need to discriminate as to the party who entered into the contract containing the other insurance clause.⁶

His Honour instead applied the principles contained in Zurich and held that an additional insured or someone forming part of a group identified as a genus are not parties to, and do not “enter into”, a contract of insurance simply by being named as insureds.⁷ Accordingly, Lambert and SAL did not enter into the QBE Policy and were not parties to that insurance contract by virtue of being only named Additional Insureds for the purposes of section 45(1) of the ICA.⁸

On the question of the application of section 45(1) of the ICA, Rein J again declined to follow Curragh and instead followed the decisions in Zurich and ABN AMRO. His Honour stated that, following Zurich, section 45(1) of the ICA requires the relevant insured to be the party who contracted with the insurer on whom the claim is made and who is also a party to the second policy.⁹ Looking to ABN AMRO for further support on the narrow reading of section 45(1) of the ICA, His Honour rejected Lambert’s submissions and held that Lambert was not a party to the QBE Policy since the evidence pointed to Lessbrook as the contracting party (who also did not enter into the Global Policy).¹⁰

The future of section 45(1) and the rise of the ‘other insurance’ clause

This decision is an illustration of the ongoing difficulties in resolving the scope and application of section 45(1) of the ICA in cases of double insurance. Despite the academic support behind Curragh, this decision confirms that the current position (as least in NSW) regarding the construction of section 45(1) of the ICA is that the relevant insured must be a contracting party to both the first and second insurance policies. Given the inconsistency with Queensland authority, the matter may well be destined for the High Court.

This has the potential to severely restrict the operation of section 45 and enliven many ‘other insurance’ clauses previously considered otiose. It will be interesting to see if ‘other insurance’ clauses effectively ‘rise like a phoenix’ (to quote Conchita Wurst) from the ashes of section 45.

By Renee Gorenstein and Hannah Maher

In the recent decision of Westpac Life Insurance Services Limited v Thereze Guirgis,¹¹the Supreme Court of Victoria, Court of Appeal, refused the applicant insurer’s application for leave to appeal a decision of the County Court requiring the insurer to indemnify the insured under a ‘Westpac Income Protection Plus’ insurance contract.

This decision demonstrates difficulties faced by insurers seeking to rely on section 29(2) of the Insurance Contracts Act 1984 (the Act) to avoid an insurance contract on the ground of fraudulent non-disclosure or misrepresentation.

Background facts

In September 2007, the respondent insured took out a life insurance policy with the applicant insurer. Relevantly, the policy provided for payment of a monthly total disability benefit in the event that the insured suffered a total disability (or a partial disability benefit, as the case may be) within the meaning of the policy.

The insured made a claim under the policy in October 2011. In her claim form she claimed that she had reduced her working hours because she was suffering from fibromyalgia.

The insurer proceeded to make monthly payments to the insured under the policy between October 2011 and June 2012. However, on 20 June 2012, the insurer wrote to the insured asserting that the insured had failed to comply with her duty of disclosure under section 21 of the Act by failing to disclose her fibromyalgia when the policy was entered into.

The insurer purported to avoid the policy under section 29(2) of the Act. Section 29(2) provides that, if an insured’s failure to comply with his/her duty of disclosure or an insured’s misrepresentation was done fraudulently, the insurer may avoid the life insurance contract.

The insured issued proceedings in the County Court on 14 February 2013. In addition to denying liability, the insurer counterclaimed the monthly payments it had previously made under the policy. On December 2014, the trial judge dismissed the counterclaim and made an order that the insurer indemnify the insured in accordance with the terms of the policy.

The decision on appeal

The insurer sought leave to appeal against the orders of the trial judge. The insurer submitted that the judge erred in finding:

3. that there was no fraudulent non-disclosure or misrepresentation and erred in his application of Briginshaw v Briginshaw when dealing with the standard of proof; and
4. that the insurer would have entered into the contract even if the insured had not failed to comply with her duty of disclosure or had not made misrepresentations before the policy was entered into.

On the question of fraud, the Court considered a ‘personal statement’ completed by the insured before the policy was issued. The insured maintained that she had completed her personal statement honestly and completely. The insured gave evidence that, prior to completing the personal statement, none of her medical practitioners had mentioned fibromyalgia to her. The Court of Appeal concluded that the trial judge had the benefit of seeing and hearing the relevant witnesses and was not prepared to disturb the trial judge’s conclusion that there was no fraudulent non-disclosure or fraudulent misrepresentation by the insured.

The trial judge was not persuaded by the underwriter’s evidence that, if the insured had disclosed her fibromyalgia, a policy would not have been issued on any terms. The Court of Appeal noted that there was a gap in the insurer’s proof, in that no written guideline was ever produced to support the insurer’s position that no policy would have been issued had the fibromyalgia been disclosed. The Court considered the failure to produce the written guidelines to be ‘more than sufficient reason’ for the trial judge to find against the insurer on this issue.

The Court of Appeal also noted that the insured’s general practitioner, in filling out the insurer’s standard ‘personal medical attendance’s report’ form, did not make reference to fibromyalgia. The Court of Appeal said that, if this condition was so serious to mandate no policy being written, a specific question should have been included in the form about the condition.

Accordingly, the Court of Appeal found that the appeal did not have a real prospect of success and refused the insurer leave to appeal.

Why this decision is relevant to life insurers

Before a life insurer seeks to avoid a policy under section 29(2) of the Act the following questions should be considered.

5. Is there evidence to demonstrate that the insured knew or should have known of the relevant medical condition at the time of his/her proposal for insurance?

The Court of Appeal was satisfied with the trial judge’s conclusion that the insured was not aware of fibromyalgia when she filled out her personal statement. The insured’s oral evidence in this regard was accepted in spite of the fact that she had not disclosed that she had irritable bowel syndrome, she had undergone various diagnostic procedures and had attended a number of medical practitioners.

In determining this issue, the Court considered the insured’s evidence coupled with the evidence of the insured’s treating practitioners.

The insured’s general medical practitioner did not consider that the insured had fibromyalgia and did not discuss the condition with the insured.

The insured’s other treating medical practitioners could not recall whether or not they had specifically discussed fibromyalgia with the insured. However, the practitioners confirmed that they would have raised fibromyalgia with the insured if it was a possibility.

On the evidence put before it, the Court found that the insurer had not proven the insured appreciated that she had fibromyalgia at the time of completing her application for insurance.

6. Is the medical condition so serious as to warrant avoidance of the policy? If so, consider including a specific question about the condition in the proposal form or the form completed by the insured’s medical practitioner. Alternatively, the way in which underwriters are to view the medical condition ought to be documented in the underwriters’ practice guidelines.

The Court of Appeal considered that the absence of any question about fibromyalgia (coupled with the insurer’s failure to produce the relevant underwriting guidelines) “almost mandated a finding unfavourable to the applicant on the issue of whether it had established that it would not have entered into the policy had fibromyalgia been disclosed…¹²

7. If a life insurer relies on underwriting practices to support avoidance of a policy, the practice guidelines ought to be produced to the Court.

The Court was disapproving of the insurer’s failure to produce the underwriting guidelines in circumstances where the relevant underwriter sought to rely on those guidelines as evidence of the fact that a policy would not have been issued on any terms if the insured had disclosed her fibromyalgia.

On this issue the Court of Appeal stated as follows:

This was a gap in the applicant’s proof. Generously, so far as the applicant was concerned, the judge dealt with it only as a Jones v Dunkel issue. However, in our view, it was more than that: it was in truth, a failure by the applicant to prove the very thing the applicant sought to prove – namely, that its written guidelines would have prevented the writing of the policy.¹³

This case highlights the hurdles faced by life insurers in satisfying the requirements of section 29(2) of the Act. The clear onus is on the insurer to produce evidence to prove fraud and then to prove that, if disclosure had been made, underwriters would not have issued a policy on any terms. Further, this case demonstrates that, where findings of fact are made by a trial judge in respect of these issues, the Court of Appeal is unlikely to disturb those findings.

By Ross Donaldson

Construction of investment management insurance policy – meaning of the term of non-executive director – whether non-executive director entitled to benefit of special excess limit under the policy

Background

This was an appeal from a decision of a single judge of the Supreme Court of Victoria.

AIG issued an Investment Management Insurance Policy to the company Australian Property Custodian Holdings Ltd (Holdings) (the policy). The policy undertook to repay or reimburse an insured person for any claim made during the policy period for a wrongful management act. The policy operated from 16 July 2010 to 16 July 2011. An insured person was generally a director or non-executive director of Holdings.

Under the policy executive directors were insured for losses up to $5,000,000. Non-executive directors were entitled to extended cover by way of special excess limited to an additional $1,000,000.

Jaques sought further indemnity pursuant to the special excess limit to defend a claim brought against him as a director of Holdings, in respect to alleged wrongful managerial acts that occurred on various dates in 2006, 2007 and 2008.

A special excess limit of the policy provided as follows:

• 4.71 - Special excess limit

  A separate excess aggregate limit of $1,000,000 for each Non-Executive Director, subject to the total aggregate limit equivalent to the Limit of Liability for all Non-Executive Directors.

A director in the policy was defined as any person who was, now is or during the policy period becomes, an executive or non-executive director of Holdings. A non-executive director was defined as any natural person who serves as a non-executive director of Holdings at the time of any wrongful managerial act.

There was otherwise no other explanation or definition to assist in determining the difference between a director and a non-executive director and it was accepted by the parties that the Corporations Act 2001 offered no definition or criteria that would aid in this regard.

Issues to be determined

The decision is primarily concerned with seeking to define what the role of a non-executive director is in modern corporate life and applying that definition to the facts of Jaques involvement in Holdings and its related entities.

In determining the issue at first instance the court was required to analyse Jaques’ role over a period of time when he held roles as director of Holdings and an employee of another entity.

AIG conceded at the trial that Jaques was a non-executive director prior to 6 April 2004 and Jaques conceded that he was an executive director from 26 June 2007 but AIG did not accept that Jaques was acting as a non-executive director from 6 April 2004 up to 26 June 2007 which would entitle him to the special excess cover for claims in regard to wrongful managerial acts during this period.

Jacques involvement with Holdings, its related entities and its various personalities was far from simple. Prime Trust owned retirement villages. Holdings undertook the office of trustee of the Prime Trust. Other entities managed the businesses operated by the Prime Trust properties. Jaques accepted an invitation to become a non-executive director of Holdings in March 2001. In late 2003 Holdings negotiated to purchase a retirement village in Buderim Gardens. A management company was formed to manage the village. Jaques was asked to assist in managing the village and was employed as a general manager of Australian Property Custodians Pty Ltd (Custodians). He ceased to receive a fee from Holdings and became a salaried employee of Custodians.

However on 5 July 2004 Holdings issued a supplementary PDS which included a statement that Jaques was a director of Holdings. As an employee for Custodians Jaques also performed work for Australian Property Syndications Pty Ltd (Syndications) which was related to the Prime Trust. On 26 June 2007 the board of Holdings resolved that deeds of appointment be approved and executed to appoint Jaques as an executive director.

Jaques work and functions during the relevant period were multifaceted and hence the difficulties in characterising whether he had discharged functions as an executive or non-executive director of Holdings. The judgment examines Jaques role and duties in some detail.

Director’s role - non executive

Previous authorities would suggest the role of a non-executive director is independent of corporate management. They are not bound to give continuous attention to the affairs of the corporation. Their duties are more intermittent in nature and intended to give an independent review to the actions of management. Another, characterisation was that the role of a non-executive director is to guide and monitor the company, rather than to be involved at an operational level.

Characterising the role of a non-executive director – finding of Court of Appeal

The Court of Appeal upheld the primary judge’s finding that Jaques acted as a non-executive director of Holdings, and was entitled to cover under the special excess limit extension of the policy. The appeal was dismissed. The court provided helpful guidance on the roles of executive and non executive directors.

The fact that Jaques was on an employment contract with Custodians, and not with Holdings until June 2007 was an important fact that assisted the court in characterising Jaques’ role with Holdings.

Relevantly, the court agreed that generally a non-executive director will be one who is not a full time operative of the company, and who is not otherwise employed by it or is delegated by it to act in its affairs.

The role of the non-executive director is generally considered to be the role of an independent overseer of the board and the company, but without operational or administrative control, which is generally left to the executive directors.

How a director is held out to the public, including the investing public, for example in company publications or corporate lodgings is not determinate.

The subjective views of the board or its individual directors as to their roles is also unlikely to be determinative.

All directors will owe a duty to exercise independent judgment and supervision as a board member. There is no different duty owed between the two roles. However the standard of care owed may vary between executive and non-executive directors.

The actual duties performed by the director is determinative of the issue. The role of a non-executive director is fundamentally different from an executive director due to their lack of involvement in the day to day management of the company.

Lessons for insurers

In circumstances where Jaques’ roles in working with the Holding and related entities was multifaceted, AIG may have been better served to avoid coverage uncertainty by seeking to clearly define what it considered to be the role of a executive and non-executive director from the outset of policy cover, given the additional cover it offered to non-executive directors. As the Court of Appeal observed there was no useful definition in the policy and the Corporations Act did not assist. The parties were left to characterise Jaques conduct by relying on a handful of previous decisions of the courts with all the uncertainty that approach entailed.

The decision is otherwise a useful examination of the different roles of executive and non-executive directors, and their duties with reference to previous leading authorities. It will have relevance to corporations law generally and will assist advisors in determining the liability of directors in actions against them in future proceedings.

By Julie Darley and Daniel Troy

Civil procedure – summary judgment – insured granted order for summary judgment in action for recovery of payment made to home owners under statutory building and construction insurance scheme – insured appeals on basis that payment not made in accordance with Act – appeal allowed – whether insurer complied with Act in making payments to home owners is a justiciable issue for trial

In Samimi & Anor v Queensland Building and Construction Commission,¹⁴ the Queensland Court of Appeal allowed an appeal brought by a builder granting relief from an order for summary judgment in the District Court of Queensland. This decision is a rare example of a builder successfully defending recovery proceedings initiated by the Queensland Building and Construction Commission (QBCC) for payments made under the statutory insurance scheme established by the Queensland Building and Construction Commission Act (1991) (Qld) (Act).

Background facts

Kamran and Mojgan Samimi were the directors of a building company, which carried out residential construction works on two buildings for the building owner. Following a dispute with the building company, the owner subsequently terminated both construction contracts for these buildings and made a claim to the QBCC under the statutory insurance scheme established in Part 5 of the Act for the costs associated with non‑completion of the construction work.

The QBCC considered that the owner's claim was valid and paid the owner $400,000 in accordance with the policy. In turn, the QBCC initiated recovery proceedings under section 71(1) and section 111C of the Act against the Samimis to recover this sum, and sought summary judgment on the claim which was initially granted by the District Court but ultimately refused by the Court of Appeal in allowing the appeal of the primary judge’s decision.

This case demonstrates the circumstances in which a court may be persuaded to look behind and challenge the QBCC’s processes after payment has been made to a home owner.

The decision on appeal

At first instance, the QBCC was awarded summary judgment against the Samimis, primarily, on the basis that there was no factual dispute requiring a trial and that a decision made by the QBCC to make a payment under the insurance scheme was not justiciable. The trial judge's decision was appealed, on grounds including that the material presented to the trial judge raised a dispute of fact regarding the amount paid by the owner on the original building contract, which would then impact on the amounts payable under the statutory insurance scheme. Indeed the amount paid on the original contract, in accordance with the Samimis submissions, would have meant that no sum would have been payable under the statutory insurance scheme.

On appeal, Boddice J delivered the leading judgment with McMurdo P and Morrison JA agreeing. The appeal was ultimately allowed on the basis that the matter did not satisfy the test for summary judgment found in r 292 of the Uniform Civil Procedure Rules 1991 (Qld). Boddice J noted that the Samimis had put on the record, legitimate questions of fact and discrepancies raised in the QBCC's submissions mitigating against granting summary judgment.

Although the Act has been interpreted as providing the QBCC with a right of recovery which is not dependent on establishing the legal correctness of a determination to make a payment or an anterior step that has led to the decision to pay, the Court found a factual error can be the subject of a proper defence to a claim for recovery under section 71(1). Section 71(1) of the Act requires as a pre‑condition for recovery that a payment was made “on a claim under the insurance scheme” rather than just any payment.

His Honour did not accept the QBCC’s submissions that section 71(1) of the Act precludes any judicial inquiry as to whether the QBCC has complied with the Act in making payment to the home owners. It was held that recovery under section 71(1) of the Act required the QBCC to make a valid payment on a claim under the insurance scheme. In circumstances where there is cause to question whether a payment on the insurance scheme was made in accordance with the terms of the scheme, factual matters sought to be raised by way of defence should be considered as justiciable under section 71(1) of the Act.

Summary

Once payment has been made by the QBCC under the statutory insurance scheme, the defendant/builder to recovery proceedings cannot usually go behind QBCC’s processes to challenge the underlying payment as a defence to the recovery action. To defend a recovery action under the Act, the defendant must show the QBCC made a factual error, such that the payment was not made “on a claim under the insurance scheme”. This case shows that if a defendant can raise evidence to suggest the payment made by the QBCC was not “on a claim under the insurance scheme” it will amount to a justiciable issue warranting determination at trial.

By Ray Giblett and Julian Fahrer

Winding up – proof and ranking of claims – proceeds of contracts of reinsurance – reinsurance company in liquidation – liquidator sold debts to third party under an assignment agreement – court held s562A(1)of Corporations Act 2001 not applicable – payment under assignment agreement not a payment received by liquidator “under the contract of reinsurance”

The NSW Supreme Court recently considered whether s 562A of the Corporations Act 2001 (Cth) applies to moneys received by a liquidator in exchange for the assignment of debts under a reinsurance contract to a third party.

Black J held the provision did not apply in such circumstances because the relevant payments were received pursuant to an assignment agreement between the liquidator and a third party and not “under the contract of reinsurance.”

Show me the money

HIH was an insurance company in liquidation and had outstanding debts under contracts of reinsurance. HIH’s liquidators anticipated having difficulty recovering certain of these debts, and so sold them at a discount to a third party under an Assignment Agreement.

Section 562A generally provides that reinsurance payments to an insolvent insurer must first be applied to meet amounts payable under contracts of insurance. Accordingly, if s 562A(1) applied, then pursuant to s 562A(2)-(3) the liquidators would be required to distribute the reinsurance proceeds among the insured creditors.

The Plaintiffs in this case sought an order under s 562A(4) to the effect that s 562A(2)-(3) (the broad pooling provisions) would not apply and the moneys could be applied to specific liabilities.

However, the relevant reinsurance debts had been assigned to a third party under the Assignment Agreement, which provided that the HIH companies would “absolutely assign to the third party all rights, title, benefit and interest in the Debts (as defined)”. The assignment was not a novation or assignment of the insurance contracts themselves, but only of the relevant debts. Black J accepted the Plaintiffs’ submission that the Assignment Agreement was in the nature of a ‘factoring agreement’, in that it involved the transfer to a third party of the ability to receive the proceeds of a debt in return for a discounted sum of money.

Was the payment ‘under’ the reinsurance contract?

The Plaintiffs submitted that the terms of the provision were satisfied as the payment arose ‘under’ the reinsurance contract, notwithstanding the fact that it arose because of the Assignment Agreement.

In response to this submission, Black J held that s 562A had only been partially satisfied in this case. His Honour said the Plaintiffs were insured under a contract of reinsurance and an amount in respect of the liability insured against was received by the liquidator in respect of that liability. However, the requirement in s 562A(1)(b) that this amount was received “under the contract of reinsurance” was not satisfied. His Honour suggested that the amounts received by the liquidator under the Assignment Agreement were not received “under the contracts of reinsurance”, whether that phrase was interpreted in a broad or narrow sense. The receipt of moneys under the Assignment Agreement could be differentiated from those received under the reinsurance contracts on the grounds that:

1. the sale of the debts at a discount reflected the risk that they were potentially uncollectable;
2. the assignment was in substitution for receipt of debts under the contracts of insurance; and
3. the amount paid by the third party was paid irrespective of whether the debts were ever collected by it, and the third party was not required to account to the liquidators for debts that it bought and later recovered.

In holding that s 562A did not apply to this case, Black J summarised his reasoning as follows:

the relevant payment under the Assignment Agreement was made, not under the contract of reinsurance, but in substitution for any payments that the liquidator would have received had it received a payment under the contract of reinsurance. The requirements of s562A(1) are therefore not satisfied and that section does not apply to the relevant payment.

A frustrating result?

The Plaintiffs also argued that a finding that the moneys were paid under the Assignment Agreement and not under the reinsurance contract would frustrate the policy of s 562A, or at least an insured’s expectation that they would receive the benefits of payments made under the contracts of reinsurance in the circumstances.

His Honour rejected this submission on the ground that the terms of the section clearly allow for an alteration of priority among insured parties, and that a “general appeal to policy” would only serve to “divert attention” from that fact.

The Plaintiffs’ final argument was that a “literal” (or narrow) interpretation of s 562A would allow liquidators to routinely defeat the purpose of the section by assigning debts to third parties. Black J summarily rejected the submission, opining that any liquidator taking such a course would be liable to have their conducted investigated by the court under s 536.

Getting your priorities right

The major takeaway from this case is that reinsurance proceeds, if assigned, may not in fact be quarantined from the normal claims of creditors of insolvent companies and allocated to insurance creditors. If so, the ‘proceeds’ will be available to the general body of unsecured creditors.

Alternatively, assignment may be a mechanism employed to frustrate the usual priority afforded by s562A. It remains to be seen whether s 536 (allowing the Court or ASIC to intervene if a liquidator is not performing their functions faithfully) provides an adequate safeguard in this respect.

By Jehan-Philippe Wood and Karen Francis

Civil and political rights – discrimination – Equal Opportunity Act (Victoria) – unlawful discrimination on the basis of a disability – mental health exclusion in travel insurance policy – exclusion and denial of claim based on exclusion is discriminatory – insufficient evidence to prove insurer can rely on statutory exemption

Summary

• On 27 October 2015, Ella Ingram commenced a claim against QBE Insurance (Australia) Ltd (QBE) in the Victorian Civil and Administrative Tribunal, Human Rights Division (VCAT) in respect of QBE's denial of her claim for reimbursement of costs under a travel insurance policy, which excluded claims related to mental health.
• In what is being hailed as a ‘landmark’ decision, the VCAT held that QBE discriminated against Ms Ingram when it issued her with a policy which included a mental health exclusion and when it relied on that exclusion to refuse indemnity. It also held that QBE could not rely on the statutory exceptions to justify the discrimination, as it produced no evidence to prove the exclusion was based on actuarial or statistical data or that it would have suffered unjustifiable hardship had it not included the exclusion. The VCAT ordered QBE to pay Ms Ingram approximately $4,000, being the value of her cancelled trip, and $15,000 for hurt and humiliation.
• While the decision turns on its own facts, the case touches on issues which go to the heart of how insurers assess and manage risk and the decision will likely prompt insurers to re-assess how they use exclusions. In particular, it may prompt them to reconsider whether particular policy exclusions run the risk of being discriminatory and, if so, whether they have sufficient evidence to meet the reasonableness tests in the relevant anti‑discrimination laws.
• Apart from this, where commercial pressures allow, insurers may need to consider other ways of managing risk in relation to particular products, such as by reducing the amount of cover available or increasing premiums.

Facts

In late 2011, 17-year-old Ella Ingram booked a school trip to New York and purchased a trip cancellation insurance policy with QBE. In January 2012, Ms Ingram, for the first time, experienced symptoms of depression. She was later diagnosed with severe depression for which she received treatment. On her doctor’s advice, she cancelled her trip. Subsequently, she claimed compensation from her travel insurer, QBE, who rejected the claim on the basis that the travel insurance policy, which had been issued in December 2011, excluded coverage for claims related to mental illness.

Claims of discrimination and QBE’s defences

Ms Ingram claimed that:

8. by including the mental health illness exclusion in the policy, QBE treated her unfairly because of her disability, contrary to s 44(1)(b) of the Equal Opportunity Act 2010 (Vic) (EOA); and
9. by refusing to indemnify her on the basis of the policy, QBE treated her unfavourably because of her disability contrary to s 44(1)(a) of the EOA.

In response, QBE said:

10. on a proper reading of the definition of ‘disability’ in the EOA, Ms Ingram did not have an ‘attribute’ for the purposes of the EOA at the time she purchased the policy and therefore her claim must fail;

11. alternatively, if it did discriminate against Ms Ingram in either of the ways alleged, the discrimination was lawful because the exemptions under the EOA and/or the Disability Discrimination Act 2004 (Cth) applied.

Meaning of ‘disability’ in the EOA

The EOA defines ‘disability’ as including ‘a disability that may exist in the future (including because of a genetic predisposition to that disability)’. QBE submitted that the words were intended to capture persons who already had a disability but whose disability was not yet manifest, so that Ms Ingram would be required to provide medical evidence demonstrating that she was suffering from an undiagnosed illness at the time the policy was issued, in order to show she had a ‘disability’ as defined in the EOA.

Ms Ingram submitted that the definition applied notwithstanding that a person’s disability may not be apparent at the time the policy was issued and that future disabilities are not limited to those to which persons are genetically predisposed.

In determining the proper construction of the statutory definition, the VCAT considered various extrinsic materials including the Explanatory Memorandum for the 2010 Bill, as well as s 32 of the Charter of Human Rights and Responsibilities Act 2006 (Vic). The VCAT held that the extrinsic materials did not aid in the interpretation of the definition and that a Charter-consistent interpretation would require that the definition be interpreted widely and without limitation. The VCAT held that at a December 2011, Ms Ingram was a person for whom a disability may exist in the future and, therefore, she had an ‘attribute’ for the purposes of the EOA at the time she purchased the policy.

Claim of discrimination

The VCAT held that the inclusion of the mental health exclusion was an act of discrimination contrary to s 44(1)(b) of the EOA as it was proposed unfavourable treatment on account of an attribute that may exist in the future. QBE accepted that when it declined indemnity it refused to provide a service and treated Ms Ingram unfavourably. The VCAT therefore held that QBE engaged in direct discrimination contrary to s 44(1)(a) of the EOA.

Exemptions under the EOE and DDA

Section 47 of the EOA and s 46 of the DDA make it lawful for an insurer to discriminate by refusing to provide insurance or in the terms in which the insurance is provided, if certain conditions are met. As QBE did not refuse to provide insurance, the first part of the exemption was not relevant. The relevant exclusions in the EOA and DDA are largely the same and provide that discrimination is permitted if it is based on actuarial or statistical data on which it is reasonable for the insurer to rely and is reasonable having regard to the data and any other relevant factors.

Use of actuarial or statistical data

QBE submitted that the exemptions are informed by the legislative policy underpinning insurance, as set out by the High Court in Australian Mutual Provident Society v Goulden and Ors [1986] HCA 24 (a case dealing with life insurance); namely, life insurance business is more likely to prosper and the interests of policy holders are more likely to be protected if the insurance company is permitted to clarify risks and fix rates of premium in that business in accordance with its own judgment founded upon the advice of actuaries and the practice of prudent insurers. The VCAT accepted that the High Court’s observations in Goulden were consistent with the relevant exemptions in the EOA and DDA.

QBE produced an actuarial report dated 31 August 2015 (the Pitt/Kyng Report), prepared for the purposes of the litigation, and relied on statistical and other reports of various dates between 2007 and 2013, some of which were appended to the Pitt/Kyng report. QBE acknowledged that there was a paucity of evidence of a direct or specific link between its decision to incorporate a general exclusion for mental illness and the statistical data, and it acknowledged that there was no evidence that it incorporated the mental illness exclusion on the basis of contemporaneous actuarial data. Despite this, it invited the VCAT to infer that it had taken the statistical evidence into account.

While the VCAT was willing to infer that QBE considered the mental illness exclusion prom the time of the policy wording in March 2010 and had a reason for including the exclusion, it was not willing to infer that QBE took the statistical evidence into account when drafting the exclusion or when deciding to refuse to indemnify Ms Ingram. It therefore held that neither the EOA exemption nor the DDA exemption applied:

‘Unjustifiable hardship’

The VCAT went on to consider at length whether the ‘unjustifiable hardship’ exemption in s 29A of the DDA, via s 47(1)(a)(ii) of the EOA, applied.

The parties approached the questions from different angles. Relying on the Pitt/Kyng Report, QBE submitted that it would suffer an unjustifiable hardship if it was unable to rely on the mental illness exclusion. Ms Ingram submitted that s 29A requires looking at the actual discrimination and asking whether QBE would have suffered unjustifiable hardship had it paid Ms Ingram’s claim.

VCAT approached the question of unjustifiable hardship on the basis of the exclusion, not on the basis of the actual discrimination, but held that on either approach the outcome of the claim would be the same. The essential point was that the Pitt/Kyng Report did not prove that it was reasonable for insurers to exclude mental illness claims from travel insurance policies or that insurers would have to increase premiums or bear losses for offering coverage for mental illness claims. QBE submitted that it would have to increase premiums but produced no evidence to substantiate this claim.

Further, while the VCAT accepted that, under the approach taken by the Federal Court in King v Jetstar Airways Pty Ltd (No 2) [2012] FCA 8, a reduction in profits might be sufficient to amount to an unjustifiable hardship, there was no reliable evidence on which it could safely find that there would be a reduction in profits.

VCAT therefore concluded that the unjustifiable hardship exclusion in s 29A of the DDA did not apply and QBE’s discrimination was unlawful.

Damages

Ms Ingram sought declarations that QBE unlawfully discriminated against her in respect of the two claims made, compensation for economic loss or approximately $4,000, compensation for non-economic loss of $20,000 and costs.

QBE submitted that as Ms Ingram had sought a declaration under s 124 of the VCAT Act and not a finding under s 125(a) of the EOA, she had no entitlement to orders for further action or for compensation for economic or non-economic loss.

The VCAT concluded that as it was not a court of pleadings and QBE had conceded that the case was fought on the question of whether it breached s 44 of the EOA, it went without saying that Ms Ingram was seeking a finding under s 125 of the EOA. However, as the finding of unlawful discrimination turned on the way QBE had prepared for and run its case, the VCAT would not make the declaration sought, so as to ensure that an impression was not given that the decision automatically extended beyond the dispute between the parties and, in particular, to avoid an impression that it applied to all insurers. In short, it sought to confine the decision to its facts.

There was no dispute as to the quantum of Ms Ingram’s economic loss, and the VCAT made an award for the amount claimed.

As to the claim for non-economic loss, QBE relied on QBE Travel Insurance v Bassanelli [2004] FCA 396 and submitted that the quantum should be limited to $5,000 and the award should not include an element which reflected Ms Ingram’s very public efforts to raise the profile of her claim. The VCAT considered Bassanelli and other cases and the circumstances of the case before it, including Ms Ingram’s closing submissions and her evidence that she had felt the refusal of indemnity to be stigmatising, and awarded her $15,000.

On the question of costs, the VCAT held that there was no basis to depart from the usual position under s109 of the VCAT Act that the parties bear their own costs, save in respect of some costs incurred by Ms Ingram as a result of the late tender of evidence by QBE.