CASE ON COMMERCIAL LAW

QUESTION

The Business School

BULAW1503: Assignment

Due Date: Friday, noon, of Week 8

Please ensure that in completing this task you comply with the instructions in the course description. Read them carefully. In particular ensure that you:

• Acknowledge all information and material you obtain from internet and other sources
• Attach a completed cover page when submitting the assignment
• Answer the questions asked below
• Include a bibliography of sources that you have used.

Jason approachesAllinsurancefor insurance over the house he is renting. He will use the house as his home, butfor extra income will have a fellow student rent one of the rooms in the house (contrary to the terms of the lease he signed for the house). Jason also plans to make jam to sell at the local market.

a)    Given the above information, what is the duty of disclosure required by the Insurance Contracts Act 1984 (Cth) of both Allinsurance and Jason? That is, what must Allinsurance tell/ask and how does Jason assess what information he has to disclose? In your answer explain the effect of the relevant sections of the Act and use one case as illustration.                 (15 marks)

b)    Assume that Jason fails to mention that he will be renting a room or that he will be making food to sell at a market. The only question Jason saw that might have been relevant was ‘do you intend to use the premises for business purposes?’ Jason answered ‘no’. One day Jason finds that someone has broken down the door to the outside shed in which he has been storing the jam and has caused $4000 damage. Jam worth around $500 in total has also been stolen.Allinsurance is refusing to pay up on either of the claims because Jason hasn’t made full disclosure. Is this correct? Does the company have the right to reject the claim? (Refer to ss 28 and 31 of the Insurance Contracts Act 1984 (Cth))                                                                   (12 marks)

c)  Assume that Jason also discovers that his tenant has been growing marijuana in his bedroom and water has dripped onto the carpet, causing $5000 of damage. Allinsurance is also refusing to cover this damage on the basis that Jason was responsible for illegal activities being carried out in the house.  Is this correct? Does the company have the right to reject the claim?

(8 marks)

SOLUTION

1.  In present case, Jason entered into insurance contract with Alinsurance Co. for insurance of his house. Generally in a contractual agreement meeting of minds are very important. So that the parties to the contract must rely on the facts told to other, it must be the final one. Jason, had not informed Alinsurance, to whom he approached for insurance of his house, about the purpose for which the house is it to be used. Neither had he disclosed that he had rented the house for some extra money.  Jason’s not disclosing these facts to the insurer may affect his right to claim insurance money in future. The other things which make a contract void are fraud, duress, incapacity, undue influence, mistake, and misrepresentation. Likewise, in a contract of Insurance also, there is a duty on the person who is insured and one who is the insurer to disclose everything which is related to the subject which is to be insured. [Khatiwada Apoorba, 2008] Because it is generally presumed that the insurer knows nothing about the thing which is being insured. Section 21 of Insurance contract Act 1984 provides that the insured has a duty of disclosure every fact which is known to him related to the insurance to the insurer before entering into the contract. The insured has to disclose all matter which he knows and is relevant for insurer to decide whether to take the risk or not. Secondly any fact which is reasonable man can feel relevant for the insurance. [Insurance Contract Act, 1984] The reason behind imposing such duty on the insured is the presumption that he has to have any information related to the insured subject which the other person can not have. Second thing, that one of the parties in commercial transactions like this may have the advantage over other may be economically or other resources, so there must be a mutual trust and understanding between them. These circumstances are rightly illustrated in the famous case of Carter v Boehm, where Lord Mansfield observed that, “Insurance is a contract upon speculation……”, while computing a risk, the special facts on which it lies must be in the knowledge of the person insured and the person computing trusts on the representation made by him. Insurance Contract Act 1984 is the legislations which are used for dealing with the situations related to insurance contracts and rights and remedies for insured and insurer in Australia.  The main objective is to strike the balance between the interest of insurer and insured. The formation of Insurance Contract is governed by the general contractual principles. The insurer has to be confident upon the he has not kept any relevant information to himself to mislead the insurer. Hence this duty of disclosure applies under the principle of utmost good faith as well as principle of equity. Rather we can say that this is concept based on common sense that you should disclose everything related to the subject to be insured so that it will be easy for the insurer to compute the chances of any risk in that. Duty of good faith and equity are the flexible duties upon the insured, whereas, the duty to disclose facts related to the subject is the stricter one which has its own consequences.  Another clause of this section 21 exempts the insured from disclosing those facts which are very obvious, which the insurer knows in ordinary course of business. In insurance law, this knowledge word has been interpreted in wide sense it includes every knowledge which an insurer actually knows and also which he ought to be. As held in the case of Australia and New Zealand Bank v Colonial and Eagle Wharves Ltd. He is also not required to disclose the fact which is likely to diminish the risk. If the insured person, in any circumstance, failed to disclose any fact or gives irrelevant answer, then the insurer has the right to make the contract void as he thinks there is gross non disclosure. It should also be noted that all the information are to be disclosed by the insured before the conclusion of insurance contract. (Looker v Law union, 1998) Section 23 of Insurance Contract Act, 1984 describes the things which are to be disclosed by insurer to insured. This directs insurer to disclose the insured about the application of section 21. Where the regulations required that the insurance contract must be in writing he has to do it. Sub section (3) of the section says that if any insurer does not comply with subsection (1) then he can also not use subsection (3) of section 21 in his favor on the failure of disclosure by insured.   For illustration we can consider the case of Lindsay v CIC Insurance Limited (1989) 16 NSWLR 673, for the effect of non disclosure of material facts by the insured and consequences. This case was considered to be the most significant case on the duty to disclosure. After going through all the facts and clues Rojer CJ cited the case that the duty to disclose must be measured by considering that what facts the insured knew or which a reasonable man would know when in the position of insurer as relevant for the assessment of risk. The knowledge of the matter relating to property insured having insurance risk is supposed to be of owner. If he delegates the management of the property to an agent he can not be exempted from the duty to disclosure of relevant facts known to him about the property. Therefore even if the agent in this case didn’t disclose the owner about the purpose for which the property is to be used, agent’s knowledge must be imputed to be of owners. It was not suggested that the non disclosure by the plaintiff was fraudulent but the question in this case was the remedy asked by the defendant under section 28(3). The main purpose of this section is to put the insurer to the position in which he would have if the proper disclosure has been made. In such situations, the only thing which can be done is to reduce the amount of insurance money paid to the insured in case of any accident. But here in this case, from all evidence judge came to the conclusion that the knowledge of the defendant was sufficient to be called the knowledge because he knows the nature of the business and that it carries risks along with it. Hence the insurer was ordered to reimburse the plaintiff’s premium paid by them for the insurance and he will not be entitled for any redress even if the loss exceeds. [Australian & New Zealand National wide Insurance service, 2008] Hence, Jason is supposed to tell every fact related to the house insured and the insurer must also consider the facts which he ought to know for claiming their rights under this Act.
2.  Here in this case, Jason failed to disclose that he is going to use the premise for business of manufacturing Jam, he did not mentioned even about any kind of business which he is doing. Hence according to section 21 he may be held guilty for the breach of his duty to disclose all facts regarding the insured subject. Non disclosure of facts is the most relevant and material issue for the protection of insurer from paying extra money to the insured.  Also the insurer may repudiate the Insurance Contract between them. Section 28 of Insurance Contract Act, 1984 specifically deals with such situation, where the insured fails to perform his duty to disclose or made misrepresentation about it before the contract has been entered into.  [Insurance Contract Act, 1984] For insurer to avoid the contract the failure to disclose must be fraudulent or there must be fraudulent misrepresentation. Jason, carrying a food business in the house was totally not known to Alinsurance. Hence, Allinsurance has a right under Insurance Contract Act to avoid the contract and refuse to pay Jason the amount he is claiming from them on his loss of $4,000 when the walls of house were broken by someone. Allinsurance Co. had only insured the house without the kind of business Jason was doing in it.  Jason renting the house and carrying a food business was the material fact which needs to be disclosed. Here, his fraudulent intentions are not required, it is enough that he failed to disclose. In England and common law, the failure to disclose, however innocent it may be and not made fraudulently, entitles the insurer to avoid the insurance contract ab initio and supposed to be never existed.  [Birds, 1993]

There are also some situations where courts can disregard the insurers remedy to avoid the contract dealt in section 31 of the Act. According to Section 31(1) any proceeding for the non disclosure of facts by insured which has been avoided by the insurer even on the grounds of fraudulent non disclosure, the courts can disregard the avoidance of the contract, if it is not much harsh on the part of insurer. The courts in such situation may allow the insured to claim the amount paid by him as premium to the insurer or the amount courts thinks fit to put insured in the position if the contract had not been avoided. [The Law handbook, 2012]  But for every denial of remedy of an insurer the courts has to rely on the under writing evidences which plays a pivotal role in such circumstances.  Mostly, the courts decide in favor of insured unless the decision is harsh or unjust on insurer.  Like in the Case of NRG Victory Australia Limited v Hudson, held by the Supreme Court that the existence of reasonable belief that the representation by insured is true, denies the insurer his ability to avoid the contract of insurance on the basis of fraudulent misrepresentation. [Oscar Shub & John Edmond, 2008] Here, in this case also, Alinsurance can avoid the insurance contract and reject the insurance claim of Jason on the ground of failure to disclose. Whereas, as we have observed that section 31 of the Act, turns the wheel in reverse. If courts think fit on considering the evidences that the loss to Jason will be much more than the loss to Allinsurance, and it will not be harsh on Allinsurance, can disregard the avoidance of insurance contract and order allinsurance to pay the claim amount to Jason.

1. Alinsurance co. as an insurer is entitled to reject the damage claims of Jason on the grounds that it is the duty of insured to disclose the facts related to the insured subject to the insurer. (U/S-21 of IC Act, 1984) The insured is not exempted from his duty even if it delegates the premises to an agent. As in this case also, Jason is also bound by the rule. Jason rented the house to another person and due to whose negligence or illegal act, the damage was caused to the house. Now Jason claiming the damages from the insurer on the basis of insurance contract between them. There is a debate on this issue that whether insurer’s liability under an insurance contract is the liability to pay the damages caused further? There are plenty of examples of cases decided by the courts on this matter. Such as in  Luckie v Bushby, E Pellas & Co. v Neptune Marine Insurance Co., Willian Pickersgill & Sons Ltd v London and Provincial & Marine and Genral Assurance Co Ltd.  It was held in all these cases that there must be a breach of contract in which the insurer promised to indemnify insured on any damage and he refuses to do so. And subsequently the insured will claim compensation for the damage caused to him due to insurer’s breach.  Under Section 54 of the Act, the act or ommisson of the insured on which insurer relied was the main cause of damage or loss can entitle insurer only to redude the claim to the extent it may prejudice him. Effect of this is to impose a prima facie liability to pay the insured claim. Alinsurance Co. had only entered into contract of insurance with Jason and the terms are to indemnify him on any damage caused to him related to the anticipatory risk imputed by him on the time of entering into contract. Here, the damage was caused to Jason due to the illegal act of his tenant, whom he rented the house without disclosing to the insurer. Hence, Alinsurance Co. has the legal right to reject the claims of Jason on his non-disclosure. But the courts, does not allow the insurer to completely deny the claims of Insured (Jason), insurers may reduce the claim to the amount agreed as indemnity under the insurance contract to the extent this may not prejudice his rights.

Referencing

1. Apoorba Khatiwada, ‘Duty of Insurance in Insurance Contract’, [2008] viewed on 10^th May 2012 from http://www.ksl.edu.np/cpanel/pics/duty_to_diclose_in_insurance_contract_apurba.pdf
2. Insurance Contract Act, 1984, compilation presented on 2003,viewed on 10^th May 2012 from http://www.e-quine.com.au/assets/Insurance%20Contracts%20Act%201984.pdf
3. Australian & New Zealand National wide Insurance service, [2008], consumer information: Duty of Disclosure, viewed on 10^th May 2012 from http://www.ruralandgeneral.com.au/consumer-dutyofdisclosure.php
4. Birds, John, Modern Insurance Law, Sweet & Maxwell, [1993], Insurance Contract, 3rd Edition, pg 112-117
5. The Law Handbook, [2012], ‘Resolution of Insurance disputes’, viewed on 10^th May 2012 from http://www.lawhandbook.org.au/handbook/ch23s01s10.php
6. Oscar Shub & John Edmond, [2007], ‘Aspects of Australian Insurance: Reinsurance Law’, viewed on 10^th May 2012 from http://www.allens.com.au/pubs/pdf/insur/pap7sep07.pdf
7. Paul Hasting & Kris Hansen, [2007], ‘Remedies for non disclosure & misrepresentation’, Viewed on 10^th May 2012 from http://www.aluca.com/images/ALUCA%20Vic/2007/Non_Disc___remedies_and_uwriting_considerations___miniluca_VIC_13.9.07.pdf

Case Laws:

1. Carter v Boehm 3 Burr., 1905 (1766)
2. Australia and New Zealand Bank v Colonial and Eagle Wharves Ltd. 2 Lloyd’s Rep. 241 (1960)
3. Lindsay v CIC Insurance Limited (1989) 16 NSWLR 673,
4. NRG Victory Australia Limited v Hudson,
5. Luckie v Bushby, (1853) 13 CB 864; 138 ER 1443;
6. E Pellas & Co. v Neptune Marine Insurance Co., (1879) 5 CPD 34;
7.  Willian Pickersgill & Sons Ltd v London and Provincial & Marine and Genral Assurance Co Ltd. [1912] 3 KB 614 at 622;

LA68