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NSWLR] COMMERCIAL UNION v FERRCOM P/L 389

A COMMERCIAL UNION ASSURANCE COMPANY OF AUSTRALIALTD V FERRCOM PTY LTD AND ANOTHER †

Court of Appeal: Kirby P, Priestley and Handley JJA

20 September 1990, 28 March 1991

Insurance — Misrepresentation and non-disclosure — Refusal to pay claim —BBy reason of act after contract entered into — Statutory provisions —Reduction of liability of insurer — Assessment of amount “fairlyrepresenting” prejudice to insured's interests — Objective assessment —Monetary damages — Insurance Contracts Act 1984 (Cth), s 54(1).

Statutes — Interpretation — Consideration of extrinsic matters — Previous stateof law — Mischief to be remedied — Use of Law Reform Commission

C Report — Insurance Contracts Act 1984 (Cth).

Evidence — Burden of proof — Credibility and weight of evidence — Failure toask crucial questions — Inferences to be drawn.

The Insurance Contracts Act 1984 (Cth), s 54(1), provides:“… where the effect of a contract of insurance would, but for this section,be that the insurer may refuse to pay a claim, … by reason of some act ofD the insured … that occurred after the contract was entered into … theinsurer may not refuse to pay the claim by reason only of that act but hisliability in respect of the claim is reduced by the amount that fairlyrepresents the extent to which the insurer's interests were prejudiced as aresult of that act.”

Held: (Priestley JA dissenting) The Insurance Contracts Act 1984 (Cth),E s 54(1), requires the extent to which the assessment of “the amount fairly

represents the extent to which the insured's interests were prejudiced” to bemade on a subjective basis so as to reflect the monetary prejudice suffered bythe particular underwriter in the circumstances of the actual case in a manneranalogous to an assessment of damages for personal injuries. (394E, 411G,415A-B, 421G-422E)

Discussion by Kirby P and Priestley JA of the extent to which reference maybe made to a relevant report of a Law Reform Commission in construingFlegislation with particular reference to use of the report on Insurance Contracts(ALRC 20, 1982) in construing the Insurance Contracts Act 1984 (Cth).

Held further: (By Handley JA with whom Kirby P agreed, Priestley JA notdeciding). The court should not draw inferences on a relevant issue favourableto a party whose counsel refrains from asking crucial questions of a witness whocould have answered them. (418E-419G, 398A-399B)

Jones v Dunkel (1959) 101 CLR 298 and Milliman v Rochester Ry Co 3 AppG Div 109; 39 NYS 274 (1896), followed.

Note:

A Digest — INSURANCE (2nd ed) [1]; STATUTES (2nd ed) [4];EVIDENCE (2nd ed) [109]

† [EDITORIAL NOTE: An application for special leave to appeal to the High Court has been granted.]

[(1991) 22SUPREME COURT390

CASES CITED AThe following cases are cited in the judgments:

Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ InsuranceCases ¶60-813.

Barker v The Queen (1983) 153 CLR 338.Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] AC

591.Education, Regional Director of, Metropolitan East, Department of Education NSW v

BInternational Grammar School Sydney Ltd (1986) 7 NSWLR 302.Ellis v Wallsend District Hospital (1989) 17 NSWLR 553.Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1989) 5 ANZ

Insurances Cases 75,793.Harper, Ex parte; Re Rosenfield [1964-5] NSWR 58.Jones v Dunkel (1959) 101 CLR 298.Jones v Sutherland Shire Council [1979] 2 NSWLR 206.Marks v Thompson 1 NYS 2d 215 (1937). CMew and Thorne, Re (1862) 31 LJ Bcy 87; 6 LT 732; 8 Jur NS 980; 10 WR 790, LC.Milliman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896).Payzu, Ltd v Saunders [1919] 2 KB 581.Purkess v Crittenden (1965) 114 CLR 164.Wacal Developments Pty Ltd v Realty Developments Pty Ltd (1978) 140 CLR 503.Watts v Rake (1960) 108 CLR 158.

The following additional cases were cited in argument and submissions: DAccident Insurance Mutual Ltd v Sullivan (1986) 7 NSWLR 65.Barclays Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987)

8 NSWLR 514.Hadley v Baxendale (1854) LR 9 Exch 347n; 156 ER 148.Hungerfords v Walker (1989) 63 ALJR 210; 84 ALR 119.Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228.

EAPPEAL

This was an appeal from a decision of Giles J in the Commercial Division,viz, Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd(1989) 5 ANZ Insurance Cases 75,793.

V Bruce QC and K E Lindgren, for the appellant.

P G Hely QC with D J Higgs and I J McGillicuddy, for the first respondent.F

D R F Patterson (solicitor), for the second respondent.

Cur adv vult

28 March 1991

KIRBY P. This appeal from a judgment entered by Giles J raises forconsideration the meaning of s 54 of the Insurance Contracts Act 1984 (Cth)

G(the Act): see Ferrcom Pty Ltd v Commercial Union Assurance Co ofAustralia Ltd (1989) 5 ANZ Insurance Cases 75,793.

Giles J upheld the contentions of Ferrcom Pty Ltd (the first respondent)(the insured) against Commercial Union Assurance Company of AustraliaLtd (the appellant) (the insurer). Having so decided, his Honour did notneed to determine other claims which were contingent upon the insured's

NSWLR] COMMERCIAL UNION v FERRCOM P/L (Kirby P) 391

failing against the insurer. The insurer has appealed to this Court from theAjudgment entered in favour of the insured.

In this Court, it was not contested that:1. The insured had failed to notify as soon as possible a change materially

varying the facts and circumstances existing at the commencement of itspolicy with the insurer;

2. But for the Act, this failure would in the terms of the policy haverelieved the insurer entirely of its liability to the insured;B

3. The Act applied to the circumstances and that the rights of therespective parties were determined by the operation of s 54 of the Act; and

4. The onus lay upon the insurer, and not the insured, to justify its entirerefusal of the claim or to prove that the reduction of its liability to nil fairlyrepresented the extent to which the insurer's interests were prejudiced as aresult of the material non-disclosure on the part of the insured: cf Advance(NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Insurance

C Cases ¶60-813 at 74,991, 75,000.I shall approach the resolution of the appeal accepting the above

assumptions.

Reform of the law on insurance contracts:The terms of s 54 of the Act are set out in the reasons for judgment of

Priestley JA. The section appears in a remedial statute which is designed toreform the pre-existing law of insurance. Such a statute should not be given aDnarrow or pedantic construction. It should be construed, so far as itslanguage permits, to give effect to its remedial purpose. In order better tounderstand that purpose, to elucidate the mischief perceived in the pre-existing law and to clarify ambiguities in the Act, it is permissible to haveregard to the report of the Australian Law Reform Commission (theCommission) which accompanied a draft Bill which, with certain modifi-cations, became the Act. I took part in the work of the Commission which

E led to the report, which I signed. However, I shall restrain myself inelucidating its meaning. I shall confine the search for meaning to thelanguage of the Act and the words of the report. I shall not, like LordWestbury in Mew v Thorne (1862) 31 LJ Bcy 87; 6 LT 732; 8 Jur NS 980; 10WR 790, LC, rely upon what I earlier thought or said was to be meant by thereform.

Although the sections of the Act represent a minor re-arrangement of theclauses of the Commission's draft Bill, there are no changes of substance. ItFis therefore both useful and permissible to examine what the Commissionwas seeking to achieve in its draft legislation which was designed to giveeffect to the policy decisions reached in its report: Black-ClawsonInternational Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] AC 591 at622-623, per Viscount Dilhorne; (at 646) per Lord Simon; WacalDevelopments Pty Ltd v Realty Developments Pty Ltd (1978) 140 CLR 503;Barker v The Queen (1983) 153 CLR 338; see D C Pearce and R S Geddes,G Statutory Interpretation in Australia, 3rd ed (1988) at 3; cf discussion inRegional Director of Education, Metropolitan East, Department of EducationNSW v International Grammar School Sydney Inc (1986) 7 NSWLR 302 at308.

According to the Commission, the “central problem” of the remediesprovided by the pre-existing law, in a case of non-disclosure of a material


fact both before a contract of insurance was entered and arising during a Aperiod of cover, was the “disproportion” between the loss to the insuredwhere the insurance contract was avoided, normally after the loss hadoccurred (on the one hand) and the prejudice to the insurer occasioned bythe non-disclosure (on the other). In its treatment of non-disclosure duringthe period of cover, the Commission referred to its examination of theanalogous problem of non-disclosure and misrepresentation before thecontract of insurance was entered into: see the Law Reform Commission, BInsurance Contracts (ALRC 20) (1982) at 139. In its treatment of theproblem, in the context of non-disclosure before contract, the Commissionobserved (at 113):

“… The insured gets back his premium and the insurer is freed from itsobligations. But that does not put the parties back into the substantialposition they were in at the time of the contract; at that time, theinsured had not suffered an uninsured loss. In many cases the insurer's

Cremedy is out of all proportion to the harm caused by the insured'sbreach of duty. These considerations suggest that a limitation should beplaced on the insurer's right to avoid a contract for non-disclosure ormisrepresentation. The limitation which suggests itself is the substi-tution of a right to damages for the existing right of avoidance. Thatwould provide an adequate deterrent to misrepresentation and non-disclosure. It would also ensure that insurers were entitled to adequatecompensation for loss suffered as a result of breach of the insured's Dduties. Disproportionate burdens would no longer be placed on theinsured. Even so an important problem arises: the method by whichdamages should be assessed.”

By analogy, the Commission declared, the same problem ofdisproportionality arose when a material fact arising during cover was notdisclosed to the insurer as, by the contract of insurance, typically the insuredwarranted that it would.

ECuring the “disproportion” of non-disclosure law:The Commission examined methods which had been adopted in several

jurisdictions to cure the “disproportion” which it identified, in a moreequitable way. It referred (at 114n) to the Code des Assurances (1930-76)(France), art 113-119. By this provision the insurer is obliged to pay theproportion of the claim which the actual premium paid bears to the premiumwhich would have been payable if the material facts had been disclosed. In Fthis way, by French law, any additional risk and the loss attributed to thatadditional risk is in effect borne by the insured.

The Commission also referred to the then proposed directive of theCommission of the European Communities on “The Coordination ofLegislative Statutory and Administrative Provisions Relating to InsuranceContracts”. That directive adopted the principle of proportionality, but onlywhen non-disclosure was due to fault (short of fraud) on the part of the Ginsured. Where non-disclosure was not due to fault, the insurer wouldremain liable for any loss: see ALRC 20 at 114.

Next, the Commission referred to the report of the Law Commission ofEngland and Wales: Insurance Law: Non-Disclosure and Breach of Warranty(1980) (Law Comm 104), Cmnd 8064, HMSO, London, 1980. This reportwas critical of the approaches adopted in Europe. Finally, after noticing the


modified principle of proportionality accepted in the Life Insurance Act 1945A(Cth), s 83 (for mis-statements of age in proposals for life insurance), theCommission proceeded to consider common law and statutory rights torecover damages for innocent misrepresentation, for example,Misrepresentation Act 1971 (SA), s 7(1). Such legislation, at least generally,gives courts the power in cases where they consider it “just and equitable todo so” to override a rescission for misrepresentation, to declare the contractto be subsisting and to award damages to the victims of theBmisrepresentation instead of permitting it to rescind the contract entirely.Such damages are typically what the court considers “fair and reasonable” inthe circumstances.

It was against this background that the Commission (at 139) reached therecommendation on the rights of the parties during the period of coverwhere, typically, the insurer is protected by a contractual obligation, assumedby the insured, to notify the insurer of any material change of circumstances.

C It is this recommendation which is reflected in s 54 of the Act:“… Where the conduct of the insured might, in principle, have causedor contributed to a loss, a causal connection approach should beadopted. As between termination and damages in these cases, there maynot be a great deal to choose. But damages provide a more flexibleremedy in those rare cases where the insured's conduct caused orcontributed to only a part of the loss. Given the insured's superior

D knowledge concerning the circumstances of most losses, he should bearthe burden of proof. Where the insured's conduct could not, inprinciple, have caused or contributed to the loss, the insurer should alsobe limited to a right to damages. Those damages should be assessed byreference to ordinary contractual principles. That would, presumably,involve an application of the principle of proportionality. TheCommission recognises that, in some cases, that principle might bedifficult to apply. But it believes those difficulties are justified by theEneed to strike a fair balance between insurer and insured in therelatively few cases to which the principle would apply. The actual testshould be stated in terms of prejudice to the insurer. Damages shouldbe measured by reference to the prejudice the insurer has suffered as aconsequence of the insured's conduct. As in the case ofmisrepresentation and non-disclosure, the right to damages should beexercisable only by way of reduction of a claim.”F The principle adopted by the Commission was expressed in these terms (at

117):“… The nature and extent of the insurer's redress should depend on thenature and extent of the loss which it has suffered as a result of theinsured's conduct. (This would resolve the uncertainity in existing lawover the need for inducement in relation to a plea of non-disclosure.) Itshould no longer be entitled to avoid a contract, and a heavy claim

G under that contract, merely because it has suffered a small, eveninsubstantial, loss as a result of a non-disclosure or misrepresentation.As the English Law Commission noted in its discussion of theproportionality principle, it is not always easy, in retrospect, todetermine what the insurer would have done had it known the truefacts. In numerous cases, however, the insurer would be able to


establish, whether from rating guides, from its instructions to its agents Aor staff or from its prior conduct, the nature and extent of the losswhich it had suffered. It is true that it would sometimes be difficult toestablish how it would have reacted to additional moral, as distinct fromstatistical, risks. But difficulties of proof cannot be avoided if a properbalance is to be reached between the interests of the insurer and thoseof the insured. It is quite plainly contrary to the true principle ofuberrima fides to impose on the insured a burden which far exceeds the Bharm which he has done. The insurer should not be entitled to anyredress which exceeds the loss which it has in fact suffered. That is thebasic principle which lies behind the law of damages, both in contractand in tort. It also lies behind the trend towards restricting rights ofrescission for innocent misrepresentation by allowing courts to overridea purported rescission and to substitute an appropriate award ofdamages … Given the difficulties associated with proportionality andwith the causal connection test, the only appropriate method for Cassessing this amount is in accordance with the principle applicable tothe assessment of damages for fraudulent misrepresentation at commonlaw.”

An “objective” or “subjective” approach?Against this background of explanation of the “mischief” to which s 54

was addressed, the Court must apply the section, as its words permit, to theDfacts of this case. It is as well to repeat the critical words:

“54.(1) … where the effect of a contract of insurance would, but for thissection, be that the insurer may refuse to pay a claim … by reason ofsome act of the insured … being an act that occurred after the contractwas entered into … the insurer may not refuse to pay the claim byreason only of that act but his liability in respect of the claim is reducedby the amount that fairly represents the extent to which the insurer'sinterests were prejudiced as a result of that act.” E

A threshold question arises whether, in order to judge “the amount thatfairly represents” the extent of prejudice to the insurer's interests, it isnecessary to decide what the particular insurer, hypothetically, would havedone (relevantly) had it been notified of the material fact (the subjectivetest) or whether it is for the court to determine the “fair” statutoryadjustment by reference to all relevant circumstances (the objective test).

For a number of reasons I believe that the former is the correct approach. FFirst, as a simple matter of statutory construction, the focus of the closingpart of s 54(1) is upon the conduct of the particular insurer. It is that insurerwhich is prevented by law from refusing to pay the claim. It is that insurerwhose liability in respect of the claim is reduced. The extent of thatreduction is determined by reference to the extent to which that insurer'sinterests were prejudiced. To measure that extent, it is necessary to weighthe prejudice not to a hypothetical insurer, or insurers generally, but to the Gvery insurer which is deprived of the pre-existing legal right to refuse to paythe claim.

Secondly, the structure of the subsection points to the need to measure theprejudice to the particular insurer's interests. The obligation to reduce theliability in respect of the claim by an amount that “fairly represents” theextent to which the insurer's interests were prejudiced does not sanction an


open-ended assessment of what is “fair”. The court's search for a “fair”Arepresentation of the prejudice is guided by the need to measure it byreference strictly to the “extent to which the insurer's interests wereprejudiced as a result of” (relevantly) the non-disclosure. The only way thatsuch “prejudice” may be assessed, in a case of non-disclosure, is tohypothesise that the insured had disclosed the relevant fact in a timely wayand to consider what probably would then have occurred. If, in suchcircumstances, the insurer establishes that it had an invariable practice ofB declining insurance, the extent of its prejudice would be that of remaining atrisk. If the evidence shows that the insurer would simply have extracted ahigher premium, the extent of its prejudice would be loss of the marginalincrease in premium. The present case falls between these two extremes. Injudging the amount that “fairly represents” the extent to which this insurer'sinterests were prejudiced as a result of the non-disclosure, it is necessary tohypothesise what probably would have happened as between these parties

C had the material fact been properly disclosed.Thirdly, support is given to this approach by consideration of the

remaining subsections of s 54. They are not addressed to an adjustmentfashioned by reference to “an objective assessment”. They are concernedwith the particular loss which has occurred and the circumstances in whichthe loss has happened. They control, by reference to those circumstances, theentitlement of the insurer to refuse the claim. Thus the context within which,for the purpose of s 54(1), the measurement of the prejudice to the insurer'sDinterests is to be fairly represented is not at large. The task is to beperformed as between the insurer and the insured and in relation to aparticular act which would formerly have entitled the insurer to refuse to paythe claim.

Fourthly, the illustrations given by the Law Reform Commission and theprinciple which it adopted (cited above) reinforced the construction ofs 54(1) which, unaided, the words of the subsection would require. The basicE principle is said to be that “the insurer should not be entitled to any redresswhich exceeds the loss which it has in fact suffered”. But if in fact theprobability is that the insurer would not have been at risk at all had thematerial fact been disclosed, the loss which it has suffered, and the fairrepresentation of the extent to which its interests were prejudiced, is equal tothe full amount of the insured's claim. This is because, by force of s 54(1)the insurer may not refuse to pay the claim by reason only of such act. Only

F if the fair representation of the extent of its prejudice is equal to the amountof the claim is the insurer in fact restored to the position it would have beenin had the material fact been disclosed to it. For that position is, by thishypothesis, that it would not thereafter have been at risk at all.

The insurer would have excluded the risk which occurred:From this appreciation of the meaning and purpose of s 54 of the Act it is

now necessary to return to the facts of the present case. Because I haveG concluded that the fair representation of the insurer's prejudice must bejudged upon the basis of an hypothesis that the insured had informed theinsurer of the relevant material fact, it is necessary, in my approach, todetermine what would then probably have occurred.

From 1971, Mr Green of Inbush (NSW) Pty Ltd (Inbush) had been theinsured's broker. On 11 March 1987, he had obtained the relevant insurance


from the insurer in respect of two cranes as unregistered vehicles. The crane, Athe subject of the claim, became registered on 21 May 1987 in circumstancesdescribed by Handley JA. Timely notification of this material fact wouldhave required that the insurer should have been informed of the registrationin about May 1987. The crane was damaged at Darling Harbour on 16September 1987, at which time it was still a registered vehicle and still beingused as such. The claim form in respect of the claim was completed by MrGreen for the insured on 21 September 1987. Liability was declined by the Binsurer on 14 January 1988. Meanwhile, the insured had changed its brokerto Hemms Cassell & Associates Pty Ltd (Hemms Cassell). Comprehensiveinsurance for cranes was sought by Hemms Cassell from the insurer on8 July 1988. The insurer accepted the risk, but subject to the inclusion of anendorsement on the policy known as ME35A. Such endorsement excludedindemnity in respect of damage caused by overturning arising out of theoperation as a crane of a registered mobile crane.

CWhat then would probably have happened if, in May 1987, the insured hadnotified the insurer of the fact that the crane had been registered? Here, theCourt is in the realm of hypothesis. But it seems fairly clear that the insurerwould have given the notification through Mr Green of Inbush. This can beinferred quite readily from the fact that, when the damage occurred to thesubject crane, the insured arranged for Mr Green and not Hemms Cassell orany other broker to complete the claim form. It did so notwithstanding thefact that it had already engaged Hemms Cassell in respect of other insurance Dbusiness from July 1987. The evidence showed that there had been a closerelationship between Mr Green and Mr Ferrarese of the insured. Theinsured itself had had no direct contact with the insurer in connection witheffecting insurance or making claims. All such contacts had been madethrough Mr Green in the name of Inbush.

It appears inconceivable that, upon notification in May 1987 of thematerial fact, the insurer would have told either the insured or Mr Green Ethat the only possibility of securing an endorsement which would cover andnot exclude the risk of overturning of a registered crane was for the insurerto discharge Mr Green and Inbush forthwith and switch its business toanother broker. Yet only another broker of sufficient standing, who placedsufficient new business with the insurer, could have persuaded the insurer towaive its usual insistence on endorsement ME35A, containing its applicableexclusion. It is true that by the end of July 1987, the insurer had received Fdocuments on behalf of the insured from Hemms Cassell. But in respect ofthe subject policy the insurer continued to deal with Mr Green for it was he,on behalf of Inbush, who had negotiated the policy as broker. Upon thishypothesis, according to the evidence of Mr Hughes of the insurer, theinsurer would have provided and, if necessary, insisted on the endorsementME35A. Even if asked it would not have waived the endorsement so long asthe insured's broker was Inbush.

GMr Hughes was not cross-examined on his evidence concerning what hisresponse would have been to a notional inquiry by Mr Green for Inbushabout waiver of insistence on endorsement ME35A. The fact that, in othercircumstances, he might have adopted different attitudes to the endorsementis beside the point once it is accepted as probable that Mr Green for Inbushwould have continued to represent the insured to the insurer in respect of


the subject policy. Contemporaneous confirmation of the fact that no specialAarrangement would have been made for Inbush or Mr Green can be seen inthe exchange of letters by which Mr Green for Inbush on 30 April 1987applied to be appointed as an agent for the insurer. This application wasrejected by the insurer in a letter received by Inbush on 5 May 1987. Thatexchange lends credibility to Mr Hughes' statement that no favours wouldhave been extended to the insured whilst Mr Green of Inbush was its broker.Mr Hughes said that he had never waived insistence upon endorsementBME35A in respect of registered cranes although he had, on occasion, beenasked to do so.

The attitude of the insurer on this point is also confirmed by the evidencewhich showed that a sharp distinction was drawn within the organisation ofthe insurer between its several underwriting departments, notably betweenits “motor” and “engineering” departments. An unregistered crane was dealtwith by the injured's “engineering” department. However, once the craneC was registered, underwriting in respect of it was dealt with by the “motor”department. Insurance was provided on a form devised as a “CommercialMotor Vehicle Policy”. Thus, different personnel, with different claimsexperience, documentation, premium structures and procedures wereinvolved when a crane passed from the “engineering” to the “motor”department of the insurer. According to Mr Hughes, the consideration ofthe risk of overturning required specialist engineering underwriters who were

D not engaged within the “motor” department of the insurer. Theseorganisational and practical considerations help to confirm what Mr Hughesin any case said in his oral evidence, not relevantly challenged. Had theinsurer been notified that the crane was registered, (as it is conceded shouldhave occurred) the insurer would have offered a different policy. It was onebearing endorsement ME35A excluding cover in the event of overturning.

It was argued that, had this position been reached, the insured wouldprobably have shopped around elsewhere for cover against the risk ofEoverturning of its crane or would possibly have taken steps to de-register itscrane so that it could remain covered by the existing policy. As to the formercontention, I consider that it is based on a high measure of hindsightwisdom. We now know that the crane overturned. We therefore know thatthe risk of overturning was a highly relevant one against which the insuredrequired protection. But, according to Mr Hughes, such risk was not offeredby the insurer and this despite specific requests to do so. A good indicationFof what it is likely that the insured would have done, when in the hands ofInbush, can be gleaned from what actually did happen ten months after theloss when its new brokers, Hemms Cassell, sought comprehensive insurancein respect of the insured's crane. As the evidence shows, Hemms Cassellaccepted precisely the cover which Mr Hughes said would have been offeredto Inbush. They did so without objecting to the subject exclusion. It was dulyincorporated into the contract of insurance. If the new brokers accepted the

G exclusion after an event had occurred which alerted the insured (and thoseadvising it) to the peril of overturning, how much more likely is it that theordinary policy for a registered crane would have been accepted from theinsurer had it been offered upon notification of the fact of the crane'sregistration? That regular policy, by endorsement ME35A, excluded coveragainst the risk of overturning. On the probabilities, therefore, the event


which occurred would have fallen outside the insurer's cover. The insurer Awould thus not have been liable to indemnify the insured.

As to the contention that, rather than accept a policy of insurance with anexclusion for overturning, the insured would have de-registered its crane,thereby maintaining it within the pre-existing policy, I consider that thisargument too must be rejected. First, it was a possibility which was neverraised at the trial. There may have been practical reasons which would havemade that course impossible or unlikely. Such reasons may have required Bevidence and the opportunity of cross-examination particularly in relation tothe actual use of the crane at and near the Darling Harbour site. To permitthe argument to be raised for the first time on appeal would involve aprocedural unfairness which should not be allowed. In any case, theargument suffers from an even greater measure of hindsight wisdom thanthose which have preceded it. To expect of this insured or its then broker,Mr Green, that they would have sufficiently seen the risk of overturning and

Cthe necessity of insurance against that risk so as to take the active course ofde-registering the crane is so unlikely that I believe that it can be put out ofconsideration. Much more likely is it that Mr Green, like his successorsHemms Cassell, would have accepted the regular policy with its regularexclusions. If this had been done upon notification of the material facts, theinsured would not have been covered against the risk of the loss whicheventually occurred.

DConclusion: no risk — no recovery:The result is that the amount which fairly represents the extent to which

the insurer's interests were prejudiced as a result of the failure of the insuredto notify it of the material fact (viz the registration of the crane) is theamount of the claim itself. For if the insurer had been notified, theinescapable conclusion of the foregoing evidence is that the policy whichwould then have been offered would have relieved the insurer altogether of

Eliability in the events which occurred. The insurer's interests were prejudicedby its loss of the opportunity to provide its ordinary policy with the ordinaryexclusion attaching to that policy. The fact that in circumstances other thanthose which would probably have obtained the relevant exclusion might havebeen specially and exceptionally waived by the insurer is irrelevant. To take itinto account would not produce a result that “fairly represents the extent ofprejudice to the insurer in the circumstances”.

It is true that s 54 of the Act is reformatory. But it does not cut a jagged Fswathe through the respective rights of the insurer and the insured. As itsterms demonstrate, and as the report of the Law Reform Commissionconfirms, the purpose of the section was to strike a new balance to repair theperceived injustice that an insurer, once a loss had occurred, could avoid acontract of insurance and a heavy claim merely because of a small or eveninsubstantial non-disclosure by the insured. Here the non-disclosure wasmaterial, as the insured properly concedes. Had it not occurred the insurer Ghad a standard and an exceptional response. The standard response wouldhave applied in this case. The insurer would have gone off risk altogether bycancelling the policy then in force. Alternatively it would have covered thecrane but only in the form of its commercial motor vehicle policy whichincorporated endorsement ME35A excluding liability for overturning. It isthe purpose of s 54 of the Act to ensure that the insured secures no less


protection than it would have secured but for its non-disclosure. But noAmore. It is not the purpose of the section to ensure that in every case theinsured shall secure recovery. The adjustment of the rights of insurer andinsured provided by s 54 are more delicate than this. The extent of theprejudice to the insurer's interests in this case, as a result of the non-disclosure, was the failure to have substituted for the original policy thepolicy which the insurer would ordinarily provide for a registered crane. Theamount which “fairly represents” the extent of that prejudice is the amountBby which the insurer's liability under that hypothesised policy was greaterthan existed under the policy effected, which was flawed by the material non-disclosure. As, by virtue of the applicable endorsement, there was no liabilityunder the hypothetical policy the only fair representation of the prejudice tothe insurer's interests in the circumstances is the difference between liabilityfor the loss and nil liability. In this way, the amount of the insurer's liabilityin respect of the subject claim is reduced by the amount of that claim to nil.

COrders:It follows from these conclusions that the judgment of Giles J, who found

for the insured against the insurer, must be set aside. By reason of hisHonour's primary conclusion he dismissed the insured's claim against Inbushand Mr Green and other consequential cross-claims. The proceedings werethen stood over for the purpose of an assessment of damages and costorders. Upon the contingency that the insurer succeeded in the appeal, theDinsured filed a cross-appeal against the dismissal of its claims against Inbushand Mr Green. The Court has not heard any argument concerning thoseclaims. In accordance with the agreement reached at the hearing of theappeal, having come to the conclusions which I have, I would publish them. Iwould order that the balance of the appeal be heard so that the entitlement,if any, of the insured against its broker and Mr Green and their entitlementin turn against other parties to the proceedings might be determined. But the

E insurer should be dismissed from the proceedings.

PRIESTLEY JA. Ferrcom Pty Ltd (Ferrcom) contracted with CommercialUnion Assurance Co of Australia Ltd (Commercial Union) to insure amobile crane on terms in a policy headed “Unregistered Mobile MachineryInsurance” (the policy). An accident to the crane caused damage to Ferrcomfor which it sought indemnity under the policy from Commercial Union.Commercial Union denied liability.F Ferrcom began proceedings against Commercial Union claiming damagesfor breach of contract; in the same proceedings Ferrcom made claimsagainst two other defendants in the event of failure against CommercialUnion; the second and third defendants made a cross-claim against a fourthparty; Commercial Union made a cross-claim against the second defendant.

The proceedings came on for trial before Giles J, who found for Ferrcomagainst Commercial Union. He dismissed Ferrcom's claim against the

G second and third defendants; he dismissed the second and third defendants'cross-claim against the fourth party; he dismissed Commercial Union's cross-claim; he then stood the proceedings over for the purpose of making anorder referring out the assessment of damages and made various orders forcosts: see Ferrcom Pty Ltd v Commercial Union Assurance Co of AustraliaLtd (1989) 5 ANZ Insurance Cases ¶60-907.


Commercial Union appealed to this Court against the entry of judgment Aby Giles J in favour of Ferrcom implementing his Honour's finding ofliability against Commercial Union for damages. To guard against thepossibility that Commercial Union might succeed in its appeal, Ferrcom filedgrounds of appeal against the dismissal of its claims against the second andthird defendants.

At the hearing of the appeal however, the only question argued waswhether Giles J should have found that Commercial Union was liable to BFerrcom under the policy. This Court was not concerned with any of thequestions arising under Ferrcom's claims against the second and thirddefendants or under the various cross-claims; for this reason I have done nomore than indicate the existence of those proceedings, without mentioningthe issues they raised.

If Commercial Union were to succeed in that part of the appeal which wasargued, Ferrcom would then wish to submit that the factual findings made by CGiles J would entitle it to judgment against both or one or other of thesecond and third defendants. There might then be further consequences inregard to the various cross-claims. If Commercial Union were to fail in thepart of the appeal argued, the result would be that the appeal would bedismissed, there would be no need to pursue any other questions and all ofGiles J's orders would stand. It was agreed at the hearing of the appeal thatif Commercial Union were successful, the Court would publish its reasons

Dand then give all parties an opportunity to make submissions to the Courtabout the disposition of the balance of the appeal.

In arriving at his conclusion that Commercial Union was liable under thepolicy to Ferrcom, Giles J decided a number of legal and factual issues. Hisdecisions on most of these issues were accepted by Commercial Union in theappeal. This limited the argument on appeal in a way enabling me to leadinto the issue argued in this Court by a much briefer description of therelevant facts than it was necessary for Giles J to give. The full detail of the Ematter is stated in his reasons. For the purposes of dealing with what wasargued in this Court the following outline of the facts should be sufficient.

The date of the policy was 11 March 1987. The crane was thenunregistered as a motor vehicle. Ferrcom registered it on 21 May 1987.Ferrcom's agent (as found by Giles J) failed to notify Commercial Union ofthe registration. The accident to the crane happened on 16 September 1987.Commercial Union treated unregistered mobile plant insurance and Fregistered motor vehicle insurance as different classes of business.Unregistered, the crane was treated by Commercial Union as the former.Had it been registered at the time the contract of insurance was made itwould have been treated as the latter, the conditions of the contract wouldhave been in a different form and the premium would have been higher.

In these circumstances, it would be natural to suppose that CommercialUnion's unregistered mobile machinery insurance policies would be so

Gdrawn as to provide indemnity only for unregistered mobile machinery andwould have the effect that a registered crane would not fall within thepolicy's indemnity. Commercial Union indeed argued before Giles J that thepolicy should be construed as bringing about that result. This was the firstmatter dealt with by Giles J in his reasons. After a detailed examination ofthe text of the policy, his conclusion was that the cover provided by the policy

NSWLR] COMMERCIAL UNION v FERRCOM P/L (Priestley JA) 401

did not exclude registered vehicles. The cover defined by the policy wasAlimited by a number of exclusions. Commercial Union relied upon two ofthese as excluding liability, but Giles J did not agree. These holdings wereaccepted by Commercial Union in its appeal. The fact that, for purposes ofdealing with the matter actually argued in the appeal, it is accepted that therisk of accident which befell the crane was covered by the policy, is of someimportance.

The general conditions of the policy provided:B“1. Duty of the InsuredThe extent of the liability of the Company is conditional upon—

(a) the notification as soon as possible by the insured to theCompany of any change materially varying any of the facts andcircumstances existing at the commencement of this Policy.”

Before Giles J, Commercial Union contended that the registration of theC crane was a material variation within this condition. Giles J accepted this

submission. This holding also was accepted in the appeal.It was also common ground in the appeal that although Ferrcom

requested its broker to notify Commercial Union of the registration of thecrane, the broker did not do so and, as between Ferrcom and CommercialUnion the material variation condition was not complied with.

It was common ground both before Giles J and in this Court that thematerial variation condition was a true condition precedent to the liability ofDCommercial Union, and that, at common law, its non-fulfilment by Ferrcommeant that Commercial Union was under no liability to Ferrcom. Giles J'sholdings to this point would lead, were it not for s 54 of the InsuranceContracts Act 1984 (Cth) (the Act), to the failure of Ferrcom's claim againstCommercial Union. Ferrcom relied on s 54 of the Act as bringing about acontrary result. Giles J upheld Ferrcom's s 54 argument. In its appeal,Commercial Union attacked one aspect of the reasoning by which Giles J

E reached the conclusion that s 54 was applicable. Before considering thatargument, it may help an understanding of s 54 to say something about theAct. The Act is headed

“An Act to reform and modernise the law relating to certain contractsof insurance so that a fair balance is struck between the interests ofinsurers, insureds and other members of the public and so that theprovisions included in such contracts, and the practices of insurers inrelation to such contracts, operate fairly, and for related purposes.”F

The Act came into operation on 1 January 1986. A cursory examination ofit shows that it substantially affects the operation of basic provisions of thosecontracts of insurance to which it applies, which include many categories ofinsurance: see s 9. The meaning and effect of the duty of the utmost goodfaith are affected by s 12 to s 15. Whatever the interaction of s 13 andsubs (1), (2) and (3) of s 14, which seem likely to provide puzzles for courts,may turn out to be, the effect upon the operation of relevant insuranceG contracts in practice would appear to be considerable. This outcomebecomes clearer upon consideration of the definition in s 21 of the insured'sduty of disclosure referred to in s 12 and the obligation of the insurer, speltout in s 22, to “clearly inform the insured in writing of the general natureand effect of the duty of disclosure”, before a contract of insurance isentered into.


Sections 23 to 33 change the substance of the previous law about Awarranties, representations and misrepresentations, and the powers both ofinsurers and the court in cases where an insured has failed to comply withthe duty of disclosure, made a misrepresentation, or acted fraudulently.

Part V of the Act, comprising s 34 to s 55, contains three Divisionsmaking both general and particular provision relating to insurance contracts.Division 2 deals with general provisions. One of these, see s 43, makes voidany provision in a contract of insurance requiring, authorising or otherwise Bproviding for differences in connection with the contract to be referred toarbitration. Section 45 makes void “other insurance” provisions.

Division 3 of Pt V, comprising s 54 and s 55, is headed “Remedies”, andmakes a drastic alteration to the pre-existing law. Whatever the exact effectof s 54 and s 55 may be in particular situations, it is clear that they aredesigned to implement the Act's own statement of its purposes by severelylimiting an insurer's pre-Act ability to deny liability for formal reasons only

Cand to require a consideration of the substance of any dispute between aninsured and an insurer.

The Act is in great part in identical terms to a Bill prepared by theAustralian Law Reform Commission annexed as Appendix A to theCommission's report on Insurance Contracts (1982) (ALRC 20). One of thedifferences between the draft Bill and the Act is that cl 3 in the draft did notappear in the Act. Clause 3 said (at 249):

“It is the intention of Parliament that this Act and the regulations are Dto give effect to the recommendations made in the report of the LawReform Commission entitled ‘Insurance Contracts’ and laid before eachHouse of the Parliament under the Law Reform Commission Act 1973and accordingly, in the interpretation of this Act, regard may be had tothat report, including the draft legislation set out in that report.”

It may be that cl 3 of the Bill was not included in the Act because betweenthe date of ALRC 20 in 1982 and the enactment of the Act (Act No 80 of E1984), Act No 27 of 1984 had inserted s 15AB in the Acts Interpretation Act1901 (Cth). That section is as follows:

“15AB. (1) Subject to subsection (3), in the interpretation of theprovision of an Act, if any material not forming part of the Act iscapable of assisting in the ascertainment of the meaning of theprovision, consideration may be given to that material —

(a) to confirm that the meaning of the provision is the ordinaryFmeaning conveyed by the text of the provision taking into

account its context in the Act and the purpose or objectunderlying the Act; or

(b) to determine the meaning of the provision when —(i) the provision is ambiguous or obscure; or(ii) the ordinary meaning conveyed by the text of the

provision taking into account its context in the Act andGthe purpose or object underlying the Act leads to a result

that is manifestly absurd or is unreasonable.(2) Without limiting the generality of subs (1) the material that may

be considered in accordance with that subsection in the interpretation ofa provision of an Act includes —

(a) …


(b) any relevant report of a Royal Commission, Law ReformACommission, Committee of Inquiry or other similar body thatwas laid before either House of the Parliament before thetime when the provision was enacted;

(c) …(h) …(3) In determining whether consideration should be given to any

material in accordance with subsection (1), or in considering the weightBto be given to any such material, regard shall be had, in addition to anyother relevant matters, to —

(a) the desirability of persons being able to rely on the ordinarymeaning conveyed by the text of the provision taking intoaccount its context in the Act and the purpose or objectunderlying the Act; and

(b) a need to avoid prolonging legal or other proceedings withoutCcompensating advantage.”

Although s 15AB in one sense does little more than provide to courts anumber of aids to construction to choose from, many of which are quiteinconsistent with one another, it also serves the worthwhile (although quitepossibly unnecessary) purpose of freeing judges from the Procrustean rulesof interpretation arguably embedded in decisions of the kind listed inHalsbury's Laws of England, 4th ed, vol 44, par 900 at 552-553 under theD heading “Matters which are not Legitimate Aids to Construction”.

In reliance upon s 15AB I have, as I think I probably would have beenentitled to do in any event, looked through ALRC 20 in order to broaden myunderstanding of the context of the Act. I do not think that either before orafter the introduction of s 15AB non-statutory material extrinsic to an Actcould or can control the meaning to be given to an Act. On the other hand,any material extrinsic to an Act, relevant to its subject matter and within the

E stock of knowledge of the legislature enacting the statute must in my opinionhave been before the enactment of s 15AB and must still be after it,legitimate reading for someone seeking to understand the Act. The takinginto account of such material may both broaden a reader's understanding ofthe wide setting from which the terms of the Act emerged and provide datacontributing to an understanding of the words of the Act in the setting of theAct itself. Having acknowledged my use of ALRC 20 in the way I havedescribed, I will not subsequently be referring to any particular parts of it,Fbut will simply explain, where it seems necessary, what I understand is themeaning of the relevant parts of s 54.

Sections 54 and 55 are as follows:“54. (1) Subject to this section, where the effect of a contract of

insurance would, but for this section, be that the insurer may refuse topay a claim, either in whole or in part, by reason of some act of theinsured or of some other person, being an act that occurred after theG contract was entered into but not being an act in respect of which sub-section (2) applies, the insurer may not refuse to pay the claim byreason only of that act but his liability in respect of the claim is reducedby the amount that fairly represents the extent to which the insurer'sinterests were prejudiced as a result of that act.

(2) Subject to the succeeding provisions of this section, where the act


could reasonably be regarded as being capable of causing or Acontributing to a loss in respect of which insurance cover is provided bythe contract, the insurer may refuse to pay the claim.

(3) Where the insured proves that no part of the loss that gave riseto the claim was caused by the act, the insurer may not refuse to pay theclaim by reason only of the act.

(4) Where the insured proves that some part of the loss that gaverise to the claim was not caused by the act, the insurer may not refuse to Bpay the claim, so far as it concerns that part of the loss, by reason onlyof the act.

(5) Where —(a) the act was necessary to protect the safety of a person or to

preserve property; or(b) it was not reasonably possible for the insured or other person

not to do the act, the insurer may not refuse to pay the claim Cby reason only of the act.(6) A reference in this section to an act includes a reference to —(a) an omission; and(b) an act or omission that has the effect of altering the state or

condition of the subject-matter of the contract or of allowingthe state or condition of that subject-matter to alter.

55. The provisions of this Division with respect to an act or omission Dare exclusive of any right that the insurer has otherwise than under thisAct in respect of the act or omission.”

(These sections are in the same words as those of cl 54 and cl 55 of theAustralian Law Reform Commission's Draft Bill, with the exception thatwhat was cl 54(3) in the Bill was broken into two parts which became s 54subs (3) and subs (4) in the Act.)

It was common ground in the appeal that Ferrcom's non-notification toECommercial Union of the registration of the crane was an “act of the insured

… that occurred after the contract was entered into”, “by reason of” which“the effect of” the policy would, but for s 54 have been that the insurermight refuse to pay Ferrcom's claim. It was also common ground in theappeal, although it had not been before Giles J, that the failure to notify theregistration was an act in respect of which s 54(1) applied. Before Giles J,Ferrcom contended that s 54(3) applied; Giles J held against that sub-mission, and it was not pursued in the appeal. F

Stated shortly, Giles J's reasoning was that, because of s 54(1),Commercial Union was not able to refuse to pay Ferrcom's claim by reasononly of the non-notification by Ferrcom to Commercial Union of the crane'sregistration, that the extent to which Commercial Union's interests wereprejudiced as a result of the non-notification was the difference between thepremium charged for insurance of a registered mobile crane and thatcharged for an unregistered one, and that Commercial Union's liability in Grespect of Ferrcom's claim should be reduced only by the amount of thatdifference.

The steps by which Giles J reached this conclusion were, (1) the statutoryprovision in which the case fell was s 54(1) not s 54(3) or s 54(4); (2) s 54(1)required an inquiry into any prejudice of whatever kind Commercial Unionsuffered as a result of Ferrcom's failure to notify registration of the crane,


such prejudice including “prejudice arising because, had notification beenAgiven, Commercial Union would have immediately gone off risk, or prejudicearising because had notification been given Commercial Union would haverequired an additional premium” (Giles J's reasons (at 75,810-75,813));(3) the onus lay on the insurer to show the extent to which its interests wereprejudiced by non-notification; (4) Commercial Union had not shown “thatit would have been in any worse position than on risk but with additionalpremium and an increased excess” (Giles J's reasons (at 75,813)); (5) theBamount of the claim would be reduced by the amount of that additionalpremium and increased excess.

In this Court, the only one of the foregoing steps which CommercialUnion argued was wrong was step (4).

In order to explain why Giles J thought it right to take step (4) it isnecessary to outline the evidence upon which he based it. The bulk of thisevidence appears in two witness statements made by Mr P A Hughes, which,C tendered by Commercial Union, became exhibit 7. Mr Hughes had workedfor Commercial Union for eighteen years by the time of his statements,when he was the senior motor underwriter for Metro-New South Wales ofCommercial Union. He said that Commercial Union had different standardforms of policy for insurance of registered and unregistered motor vehicles.To his statement there were annexed copies of each form. He said that thereason why premiums payable on registered mobile machinery were much

D higher than those on unregistered mobile machinery was that registeredmobile machinery was subject to many additional risks. These additionalrisks all stemmed from the fact that the machinery was driven on publicstreets. The additional risks included drivers finding themselves in unfamiliarsurroundings, the possibility of collision with other vehicles, and hazardscreated by awnings, power lines and the like.

A paragraph in the first of Mr Hughes' two statements upon whichCommercial Union relied heavily, was par 5, as follows:E

“If Ferrcom had informed Commercial Union on or shortly after 21May 1988 that P&H T440 mobile crane which was the subject ofUnregistered Mobile Machinery Insurance Policy, a copy of which isAnnexure B hereto, had become registered under the Motor Traffic Act1909, Commercial Union would not have allowed it to remain coveredunder that policy. Commercial Union would then have offered to coverthe said mobile crane under the Commercial Motor Vehicle InsuranceF Policy a copy of which is Annexure A hereto. However, there wouldhave been included in that offer a condition that the policy be subject toan endorsement known as ME35A a copy of which is hereto annexedand marked ‘C’. As can be seen from that document, the effect of it isthat the mobile crane would not have been covered in respect ofdamage to it caused by overturning arising out of the operation of it as acrane. If Ferrcom had agreed to accept those conditions the premium

G which would have been charged would have been calculated at the rateof 5.5% of the insured sum of $160,000, ie $8,800 and in addition therewould have been stamp duty calculated at the rate of .07 per cent of$160,000, namely $112 making a total of $8,912.”

Mr Hughes' description of the effect of endorsement ME35A wasaccepted in the appeal as correct by both Ferrcom and Commercial Union.


Other paragraphs relied upon by both Ferrcom and Commercial Union, in Adifferent ways, were as follows:

“7. If Ferrcom had declined to accept Commercial Union's offer ofcover under its Commercial Motor Vehicle Insurance Policy with thesaid endorsement, an unusual position in my experience would havearisen. I have not ever agreed not to require that Commercial Union'sstandard printed endorsement MF35A be part of the policy. No doubt itwould be possible for Commercial Union to have agreed not to insist Bupon the endorsement in consideration of payment of an additionalpremium and possible adjustment of excess. The provision for excessunder the Unregistered Mobile Machinery Insurance Policy is $1,000plus $5,000 on the jib. The excess under the Commercial Motor VehicleInsurance Policy (including the endorsement) would have beencalculated as 1.5% of the sum insured, ie, 1.5% of $160,000, ie $2,400. Indetermining whether or not to insist upon the endorsement, I would

Chave taken into account the amount of insurance which CommercialUnion had for the particular insured, their past years claims experienceand most important the support and amount of insurance businessplaced with Commercial Union by the particular broker. I would havetaken these matters into account in order to determine whether to agreenot to insist on inclusion of condition ME35A and to assess theadditional loading in terms of premium and excess which I would haveinsisted upon as a condition of not insisting on the endorsement. D

8. The particular broker which had placed the motor vehicleinsurance with Commercial Union on behalf of Ferrcom was ClubInsurance Brokers. Inbush (NSW) Pty Limited (‘Inbush’) of whichReginald Green was a director was associated with Club InsuranceBrokers Pty Limited. Club Insurance Brokers did not have such arecord with Commercial Union that I would have agreed to providecover for Ferrcom without the endorsement. So long as the brokers Einvolved were Club Insurance Brokers Pty Limited and Inbush (NSW)Pty Limited, I would not have agreed not to insist upon theendorsement no matter what premium was agreed to be paid and nomatter what level of excess was agreed to.

9. As from 4 July 1987, Hemms Cassell & Associates Pty Limited(‘Hemms Cassell’) became the broker placing Ferrcom's insurance withCommercial Union. At least Hemms Cassell placed Ferrcom's motor Fvehicle insurance with Commercial Union as from 4 July 1988. IfHemms Cassell has applied on behalf of Ferrcom for me not to insistupon the said endorsement, I would reluctantly have agreed but wouldhave insisted upon additional premium and a higher excess. I wouldhave insisted upon an additional premium of a further 1.00% of the suminsured, ie from 5.5% to 6.5%, ie an additional $1,600 by way ofpremium. In addition I would have insisted upon a higher excess. I

Gwould have insisted that the excess be increased from 1.5% to 2% of thesum insured, ie an additional .5%, ie an additional $800….”

(The opening words of par 9 actually said 4 July 1988 but the Court wastold in the course of the argument that the parties agreed the year was 1987.)

In his second statement, Mr Hughes gave details of a transaction in July1988 when Hemms Cassell, who had by then been Ferrcom's insurance


brokers for a year, sought Commercial Motor Vehicle Insurance in respectAof two cranes which Commercial Union agreed to, subject to endorsementME35 being applicable. This condition was accepted by Hemms Cassell.(Endorsements ME35 and ME35A were treated at the trial as being tosubstantially the same effect.)

In his reasons, Giles J described the foregoing evidence, and, in the part ofhis reasons to which Commercial Union's appeal was directed, continued (at75,812):B

“This evidence of Mr Hughes was in substance unimpaired by cross-examination. Ferrcom endeavoured to show that Commercial Unionhad insured the crane or other crane at different times withoutendorsement ME35A, but did not succeed in that endeavour. It was notspecified how Commercial Union would have gone off risk in relation tothe crane, but presumably it would have involved general condition3(a)(2) of the policy whereby it could cancel the policy on 30 days'C notice: sec 59 of the Insurance Contracts Act would permit this.

In assessing the fair representation of the extent to which CommercialUnion's interests were prejudiced it seems to me that it is proper, if notnecessary, to do more than simply conclude that Commercial Unionwould have gone off risk by cancelling the policy had the notificationbeen given to it. Regard must also be paid to what Ferrcom would havedone if told by Commercial Union, upon notification having been given,

D that Commercial Union would no longer cover the crane. There was nodirect evidence of this. However, I think I can infer that Ferrcom wouldhave asked Commercial Union for the terms on which it would coverthe crane, and upon being told that it would provide cover by way of thecommercial motor vehicle policy but with endorsement ME35A, wouldhave enquired as to the terms on which that endorsement would bedispensed with. Cover against loss or damage through overturning isclearly a vital aspect of the cover required for a crane, and I decline toEconclude that Ferrcom would have done nothing.

At that stage Ferrcom may have gone to another insurer, or it mayhave pressed Commercial Union. What is uncertain is whether or notthe enquiries made by Ferrcom of Commercial Union would haverevealed to it that if it went to a broker of appropriate standing in theeyes of Commercial Union it would be able to obtain cover, at anincreased premium and with an increased excess, without theF endorsement, whether or not upon that being revealed to it it wouldhave obtained cover from Commercial Union through such a broker,and whether or not in lieu of its doing so it would have obtained coverfrom another insurer. There were other insurers in the market, but I donot know the terms they would have offered.

I ask myself how sec 54(1) is to be applied when I am left in this stateof uncertainty. It seems to me that attention must be concentrated upon

G the prejudice to Commercial Union to which sec 54(1) refers. Thepurpose of the test stated its [sic] terms of prejudice is to arrive at afigure for the damages suffered by Commercial Union by reason of thefailure to notify the registration of the crane. Where Commercial Unionwould have been prepared, albeit unwillingly, to provide cover withoutthe endorsement had the approach been made through a broker of good


standing in its eyes, I consider that I should conclude that the prejudice Ato its interests as a result of the failure of Ferrcom to notify theregistration of the crane was not that it remained on risk in relation todamage to the crane from overturning, but that it remained on riskwithout having received the additional premium or imposed theincreased excess of which Mr Hughes spoke.”

For Commercial Union it was submitted in the appeal that the issuebefore this Court was whether Commercial Union had satisfied the onus of Bestablishing that on the balance of probabilities a policy which would havecovered Ferrcom for its claim would not, if the material change ofregistration had been made known to Commercial Union, have been issuedto Ferrcom by Commercial Union at all. Two principal reasons were putforward why that issue should have been decided in favour of CommercialUnion.

The first was that on the material in Mr Hughes' first statement (which Cwas that relied upon by the trial judge) the only reasonable conclusion wasthat Commercial Union had shown that had Ferrcom complied with itscontractual obligation Commercial Union would not have issued a registeredmotor vehicle policy unless it contained endorsement to the effect ofME35A. The second, which was used both independently and as confirma-tory of the first, was that Ferrcom's acceptance (through its broker) in July1988 of the insurance of two registered mobile cranes subject to such an

Dendorsement showed what would have happened had Ferrcom complied withits obligation in 1987.

In regard to the first submission, its acceptance or rejection depends uponthe way in which Mr Hughes' evidence is regarded. Commercial Union says,when the full circumstances of the position between 21 May 1987 when thecrane was registered, and 16 September 1987 when it was damaged, aretaken into account, it is quite clear that, on the probabilities, if Ferrcom hadfulfilled its duty of notification, Commercial Union would have brought the Epolicy to an end. Facts particularly relied on are that Hemms Cassell did notbecome Ferrcom's broker until July 1987, so that if the contractualobligation had been complied with it would not have been that brokerdealing with Commercial Union in regard to the crane's insurance, and thatFerrcom's then broker would be likely to have reacted to CommercialUnion's requirement of endorsement ME35A in the same way as happenedin regard to the two other cranes a year later. FOn the other hand, Ferrcom says that Mr Hughes' evidence showed thatat least in some circumstances Commercial Union would have responded tonotification of the material variation by requiring payment of an extrapremium by Ferrcom. That meant that in those circumstances the extent ofCommercial Union's prejudice by non-notification was the amount of theadditional premium Commercial Union would have charged.

There are further matters to consider before deciding whether to acceptGCommercial Union's contention that it satisfied the onus on the probabilities

on this issue.One matter of fact not much dealt with in the argument in the appeal was

why Commercial Union sought, at least in most cases, to includeendorsement ME35A in its policies covering mobile cranes registered asmotor vehicles. However, some time was spent on this matter at the trial.


Mr Enshaw, an underwriting expert called as a witness by CommercialAUnion referred to the risk excluded by endorsement ME35A as “hookcover”. He said the exclusion of the risk meant the insurer was merelyinsuring the crane as a vehicle and not an “operating tool”. The reason forthis was that cover of cranes as operating tools was often included in anotherpolicy the owner of the crane would have, such as a construction risks policy.(This appears in par 9(b) of exhibit 2 which was admitted subject torelevance.)B

In cross-examination, Mr Enshaw gave further details of what happened inpractice concerning construction risk policies. This evidence supports theview that the practice he was describing was a common way crane ownershandled this kind of risk, but also that other ways were open to be used. Thecross-examination then contains this passage:

“Q. Perhaps if I can start this way; what sort of policy, using the namethat insurers use, does one get for a registered crane if one wants to

C cover the crane for damage it suffers other than on the road but whileworking on the road or on site and tipping over — for tipping overdamage? A. Well, really one should insist on getting a “Motor VehiclePolicy” which is amended or which has been produced by that particularinsurer to suit the insurance you are seeking. If you are insisting ongetting cover from an insurer that was not able to accommodate you, Iwould go somewhere else, but if I was stuck with that and if I am anagent I suppose I am stuck with it, I would have to ask the office toDissue a special policy and they would have to issue the same wording asthe unregistered, but it would be very difficult — you would have to goback to getting a basic motor policy adapted to cover the crane and itwould be almost impossible to get the crane adapted to cover a vehicle.

Q. But you could get a motor policy adapted to cover a crane? A.Oh yes, yes.

Q. And for that, as you have said in paragraph 10, you would expectEto pay a somewhat higher premium? A. Yes.

Q. You have mentioned that the premium would be 5 to 7 per centrather than 2 per cent for the unregistered policy? A. Yes.

Q. Is that difference between 5 and 7 per cent a difference which yousee in different insurers, in different insurance companies, or adifference depending upon the previous claims history of the insured?A. Well, they have to be, can I say, rubbery. They have to be rubberyF because it depends on so many factors; what sort of excess is going to beapplied; what is the claims record; where is it going to be used — so Iam just coming in with a range, so it is pretty elastic.

Q. With the type of excess which you refer to in paragraph 11? A.Yes.

Q. And with a good policy claims history, would you expect thelower loading, that is, the 5% rather than the 7%? A. Yes of course.

G Yes of course.”This evidence seems to me to be significant on the question of probability

now being considered.Another consideration, in the particular area of hypothesis that the

submissions of the parties led to, is a possibility raised by the Court inargument. This was that if Ferrcom had duly notified Commercial Union of


the material variation and Commercial Union remained adamant concerning Aendorsement ME35A, one distinct commercial possibility from Ferrcom'spoint of view would have been to de-register its crane. Commercial Unionwould then have had no reason to exercise any power it had under the policyto terminate it. No-one was able to suggest in argument in this Court anyaction Commercial Union could have taken to terminate the policy uponbeing notified of the material variation other than by use of generalcondition 3(a)(2) which permitted it to cancel the policy on thirty days Bnotice. Even if general condition 3(a)(2) permitted such cancellation, withoutreason assigned, at any time during the time of the policy, (the parties didnot argue to the contrary), if after registration but before any damage thecrane had been de-registered, there would have been no discerniblecommercial reason for Commercial Union to terminate and I cannot see whyin fact it would have done so.

However, there is material in the evidence relating to the damaged craneCwhich suggests it would have been inconvenient, perhaps even unlikely as a

practical matter, for Ferrcom to de-register the crane in order to keep thepolicy on foot. This material does not appear to have been investigated withthe present point in mind, and, despite the potential attraction of this point, Ihave come to the conclusion that it was not something contested at the trial,and the evidence is not in such a state as to justify this Court relying on it,one way or the other, on appeal.

DA further consideration is that on the construction of the policy acceptedby the insurer for the purposes of the appeal, the crane, although registered,was insured against the damage which occurred to it. Although this could betaken into account in the speculative enterprise of trying to assess what, onthe probabilities, would have happened if Ferrcom had made known thematerial variation to Commercial Union, it has a degree of artificiality aboutit, in that Mr Hughes' evidence gives a fairly clear impression thatCommercial Union or at least the people carrying on its business in regard Eto registered and unregistered mobile machinery, thought that theunregistered mobile machinery policy only covered machinery whileunregistered.

Finally on this point, I do not accept Commercial Union's secondsubmission. It does not seem to me that what happened twelve months laterin regard to two other cranes in circumstances, the comparability of which tothose relevant to the crane which was damaged is not made clear by the Fevidence, can have any probative weight in regard to the matter in issue.

In the end this aspect of the probabilities remains, to my mind, finelybalanced. That the onus was on Commercial Union to meet the civilstandard of proof concerning the probabilities on this point was accepted byCommercial Union in argument in the appeal, in my opinion rightly so. Itseems to me to follow from the concluding lines of s 54(1). I mention thisagain later.

GThe conclusion I have reached is based on a consideration of the part ofMr Hughes' evidence upon which Ferrcom relies together with Mr Enshaw'sevidence. That leaves an impression on me that is not overcome by the partof Mr Hughes' evidence on which Commercial Union relies. It may be that ifFerrcom had made the material disclosure to Commercial Union which thepolicy bound it to do, then Commercial Union would have insisted on the


ME35A endorsement. I am not satisfied that the evidence shows thatApossibility reached the level of probability. It is clear from Mr Hughes'evidence that it is at least a possibility that it would not have insisted on theendorsement. There was no evidence that Commercial Union neverunderwrote the particular risk. Mr Enshaw's evidence shows that it wouldnot have been unusual for an insurer such as Commercial Union to cover therisk at an increased premium.

In these circumstances, Commercial Union's submissions have notBsatisfied me that on the probabilities it is more likely than not that ifFerrcom had fulfilled its obligation to disclose the registration of the crane,Commercial Union would have terminated the existing indemnity. Thus, inmy opinion Commercial Union has failed to make good the arguments uponwhich it relies in the appeal.

It would be possible to dismiss Commercial Union's appeal on what I havesaid so far. However, Ferrcom, in supporting the conclusion reached by theC trial judge, both submitted that his reasons were correct and made a furtheralternative submission, which took as its starting point the words “fairlyrepresents” in s 54(1). This submission, if correct, showed that CommercialUnion not only failed to demonstrate error by the trial judge on the issue sofar discussed, as fought at the trial, but also that the issue should have beendifferently stated, and that if it had been, Ferrcom would clearly have beenentitled to judgment. As I think this submission by Ferrcom is right, and

D provides a more satisfactory basis for deciding the case, I will set it out.The submission was that the words “fairly represents” do not require the

court to investigate the position which a particular insurer would haveadopted in a particular case but rather require the court to make anobjective assessment of a fair and reasonable sum to compensate the insurerfor the prejudice suffered. That is, the submission involves the idea that theprejudice to be investigated is that suffered by the insurer taken as areasonable insurer in the particular area of insurance business in which theEinsurer operates, rather than prejudice arising from the insurer's ownpractices, possibly individual to itself, or indeed to particular subordinateofficers having authority to make decisions in cases such as the present. Itwould be quite possible, if the inquiry were to be what would a particularinsurer in fact have done in a case like the present, that if the matter werehandled by one officer the result would be different from that if anotherofficer, of equal authority, had made the decision. It seems to me that “fairlyF represents” does not require such an inquiry, but one into the more readilyanswerable question: “What prejudice would be suffered by the reasonableinsurer carrying on the relevant type of insurance business?”

This “objective” approach seems to me to fit better with the words ofs 54(1) than the “subjective” one. The subsection is directed to situations inwhich two elements are present. The first element is that the effect of theparticular contract of insurance would, but for s 54, entitle the insurer to

G deny liability in regard to a claim under the policy because of an act of theinsured or another person that occurred after the contract was entered into.Because of the width of the words in the opening part of the subsection, thefirst element may be fulfilled in a variety of ways. Acts which, in the absenceof s 54, would entitle an insurer to deny liability to pay a claim wouldinclude, (I am not being comprehensive), both breaches of explicit terms of


the contract of insurance and fraudulent conduct of various kinds. The words Aof the subsection embrace any act whether of either of those kinds or someother kind which, considered against the obligations and entitlementsderiving from the contract would entitle the insurer, were it not for s 54, todeny liability for a claim.

The second element necessary for s 54(1) to operate is that the Act whichwould, but for s 54, entitle the insurer to deny liability, must not be one inrespect of which s 54(2) applies; that is, it must not be an act which could Breasonably be regarded as being capable of causing or contributing to anyloss covered by the contract of insurance. The way in which subss (1), (2),(3) and (4) are expressed in regard to the “act in respect of which subs (2)applies”, to my mind shows with reasonable clearness that subs (1) dividesrelevant acts into those that could not and those that could reasonably beregarded as being capable of causing or contributing to a loss in respect ofwhich a particular insurance contract provided cover, and that subs (3) and

Csubs (4) deal only with the relevant acts described by subs (2), the idea ofsubs (3) and subs (4) being that there are acts which can reasonably beregarded as being capable of causing or contributing to a loss in respect ofwhich a particular insurance contract provides cover but which neverthelessmay in fact not have caused any or all of the loss.

Section 54(1) provides that, where the two elements I have described arepresent, the insurer may not refuse to pay the claim by reason only of an act,

Dwhich but for the section would have caused the contract of insurance towhich it related to have the effect of entitling the insurer to refuse to pay aclaim. That is, the insurer is deprived of the right to rely on what the effectof the contract of insurance would have been in the absence of s 54.Section 55 then makes it clear that the only rights an insurer has with respectto the acts spoken of in s 54 are those under the Act.

To this point the language of the subsection seems to me quite clearly tobe saying that where there is no possibility of causal connection between the Eact which could, but for s 54, be relied upon by the insurer to avoid liability,and the loss claimed by an insured under a policy with that insurer, theliability of the insurer remains untouched. The remaining part of subs (1),commencing with the words “but his liability”, in my opinion replaces theinsurer's previous right to refuse liability with a right instead to subtract fromthe amount of the claim, liability for which the insurer is now precluded fromdenying, the money amount which the insurer can show represents the Fprejudice to the insurer's interests resulting from the Act. In effect, the Acttakes away what was previously a defence, and replaces it with a cross-actionfor damages. On this approach, there seems to me to be no reason why casesmay not arise in which the amount representing the prejudice is equal to theamount of the claim. That is however not the position in the present case.

In the present case it is common ground that the relevant act for thepurposes of s 54(1) was Ferrcom's omission to notify Commercial Union of

Gthe registration of the crane. It is also common ground that this omissionconstituted non-fulfilment of a condition precedent to Commercial Union'sliability under the contract. However, even if s 54 did not apply, non-fulfilment of condition 1 would not of itself have brought the policy to anend. It was not argued that non-fulfilment of condition 1 constitutedrepudiatory conduct entitling Commercial Union to bring the policy to an


end because of that conduct, nor was any argument directed to the possibilityAthat Commercial Union treated non-fulfilment of condition 1 in this way.The appeal was conducted on the footing that the effect of the policy would,but for s 54, have been that Commercial Union could refuse to pay the claimby reason of Ferrcom's omission to notify Commercial Union of registrationof the crane simply because that omission constituted non-fulfilment of acondition precedent to liability.

Section 54(1) thus raises the issue of the extent to which CommercialBUnion's interests were prejudiced as a result of Ferrcom's failure to complywith a condition precedent to Commercial Union's liability to pay. Thesubsection seems to me to require the court not to ask what CommercialUnion would have done had Ferrcom complied with the condition precedent,but rather what prejudice did Commercial Union suffer, as an insurer in aparticular field, because of non-fulfilment of the condition precedent.

Commercial Union was an insurer which insured mobile machinery. ItC insured unregistered mobile machinery against the kind of risk which cameto pass in the present case. It also insured registered mobile machineryagainst the same kind of risk; it did so in this very case, although it may nothave appreciated the full consequences of the policy at the time when it wasissued. Its business comprehended the calculation of premiums for policiescovering risks of the kind giving rise to the claim in the present case. This isdemonstrated by Mr Hughes' evidence, both for registered and unregistered

D mobile machinery. Ferrcom did not in the appeal argue that CommercialUnion suffered no prejudice at all as a result of the omission to notify theregistration of the crane. In these circumstances it seems to me that thedifference between the premium Mr Hughes calculated as applicable to apolicy covering a registered and that covering an unregistered mobile cranefairly represented the extent to which Commercial Union's interests wereprejudiced as a result of the omission to notify.

E In my opinion Commercial Union's appeal should be dismissed with costs.

HANDLEY JA. In this appeal I have had the advantage of reading in draftform the reasons for judgment prepared by Kirby P and Priestley JA. I agreewith Kirby P that this appeal should be allowed and I agree generally withhis reasons. However I prefer to express my own reasons for reaching thisconclusion.

The respondent Ferrcom Pty Ltd (the insured) was the owner of a P&HTF 440U/12 mobile crane. It was insured by the appellant against loss ordamage under an unregistered mobile machinery insurance policy as from11 March 1987. The proposal for this insurance was submitted through aninsurance agent Inbush (NSW) Pty Ltd (the agent) which was a companycontrolled by Mr Green. Mr Green had been a business acquaintance ofMr Ferrarese, the principal of the insured, for some sixteen years andthroughout this period he had arranged insurance covers on behalf of the

G insured.At the date of the proposal the crane was working on the site of the new

Parliament House at Canberra. Accordingly there was no need for the craneto be registered as a motor vehicle. However by late March 1987 the insuredhad no further need for this crane at the Parliament House site and it wasbrought back to Sydney. The insured then applied for the crane to be


registered as a motor vehicle in New South Wales. Registration was finally Aeffected on 21 May.

Mr Green had previously warned Mr Ferrarese to inform himimmediately if any of his unregistered mobile cranes were to becomeregistered. The trial judge found that Mr Ferrarese advised Mr Green of thepending registration on 7 May. Mr Green failed to pass this information onto the appellant. Accordingly when the crane overturned and was extensivelydamaged during a lifting operation at Darling Harbour on 16 September that Byear the unregistered mobile machinery policy was the policy in force.

The appellant denied liability under the policy. The ensuing litigation isreferred to in the reasons for judgment of Priestley JA and I will not repeatthe details. The trial judge (Giles J) in a careful and detailed judgment,which has only been the subject of appeal on a single issue, found that thecrane, despite its later registration, remained within the cover provided bythe policy and that certain exclusion clauses relied upon by the appellant didnot apply. The trial judge also held that the insured, by failing to notify the Cappellant that the crane had become registered was in breach of condition1(a) of the policy which provided:

“1. Duty of the InsuredThe extent of the liability of the Company is conditional upon —

(a) the notification as soon as possible by the Insured to theCompany of any change materially varying any of the facts and

Dcircumstances existing at the commencement of this Policy.”This finding was not challenged. Under the general law prior to the

Insurance Contracts Act 1984 (Cth) this breach of condition 1(a) would haveentitled the appellant to reject the claim. However s 54(1) of the Act alteredthe previous law. It provides, so far as relevant:

“… where the effect of a contract of insurance would, but for thissection, be that the insurer may refuse to pay a claim, … by reason of

Esome act of the insured … that occurred after the contract was enteredinto … the insurer may not refuse to pay the claim by reason only ofthat act but his liability in respect of the claim is reduced by the amountthat fairly represents the extent to which the insurer's interests wereprejudiced as a result of that act.”

For the purposes of this section acts include omissions (s 54(6)).Section 54 does not widen the cover in a policy but, subject to the

abatement provided for, it prevents that cover being lost through breach of a Fcondition. There was no dispute that the section applied in this case and theappeal turns on its effect. The Court was not referred to any authority inpoint. It was common ground that had the insured notified the appellant ofthe registration of the crane, the latter could only have gone off risk by givingthirty days written notice of cancellation pursuant to condition 3(a)(ii): seealso s 59.

The appellant submitted at the trial that s 54(1) defeated the entire claim, Gbut his Honour rejected this submission and held that the insured wasentitled to recover subject only to a deduction for an additional premium andan increased excess.

The first question is whether the section requires the assessment of “theamount that fairly represents the extent to which the insurer's interests wereprejudiced” to be made on a subjective or objective basis. I agree with

NSWLR] COMMERCIAL UNION v FERRCOM P/L (Handley JA) 415

Kirby P that the assessment is one that should reflect the monetary prejudiceAsuffered by the particular underwriter in the circumstances of the actualcase.

The section requires an underwriter to prove that the relevant act didprejudice its interests and to quantify its resulting loss. The section waspresumably expressed as it was because a policy condition might not bepromissory so that the underwriter may not have a cause of action for breachof contract. Apart from that consideration, it seems to me that theBassessment authorised by the section is equivalent to an assessment of thedamages suffered by the underwriter as a result of the act in question. Suchan assessment necessarily raises questions of causation.

In the present case the appellant had to prove what probably would havehappened if the insured had notified it, as required by condition 1(a) of thechange in risk which occurred when the crane was registered. This requiredthe underwriter to prove what it probably would have done had it received

C such notice: cf Ellis v Wallsend District Hospital (1989) 17 NSWLR 553,especially at 581-582 per Samuels JA.

The appellant relied on the evidence of Mr Hughes, its senior motorunderwriter. He said that if the insured had notified the appellant of theregistration it would not have allowed the crane to remain covered under theexisting policy. Instead it would have offered cover under its commercialmotor vehicle policy which would have contained an endorsement (ME35A)which excluded damage to a mobile crane resulting from overturning arisingDout of its operation as a crane. The trial judge, correctly in my view,concluded that the effect of this evidence was that the appellant wouldpromptly have given notice of cancellation. However this is not the end ofthe inquiry. As the trial judge said (Ferrcom Pty Ltd v Commercial UnionAssurance Co of Australia Ltd (1989) 5 ANZ Insurance Cases ¶60-907 at75,812):

“… Regard must also be paid to what Ferrcom would have done if toldEby Commercial Union, upon notification having been given, thatCommercial Union would no longer cover the crane.”

The appellant could not give direct evidence as to the reaction of theinsured in this hypothetical situation.

The trial judge inferred that the insured would have asked the appellantfor the terms on which it would cover the crane and upon being told that itwould provide cover by way of the commercial motor vehicle policy withFendorsement ME35A “would have enquired as to the terms on which thatendorsement would be dispensed with”. Since in his view cover against lossor damage through overturning was “clearly a vital aspect of the coverrequired for a crane” he declined to conclude that the insured would havedone nothing. I understand his Honour to mean that the insured would notsimply have accepted the appellant's offer without further inquiry.

Mr Hughes gave further evidence directed to what would have happenedG if the insured did not accept its offer of cover with the endorsement. He saidthat he had issued such policies in respect of mobile cranes but neverwithout the endorsement. He could recall occasions when he had been askedto withdraw that endorsement in relation to mobile cranes but he had alwaysrefused. He did agree that he had removed the endorsement from policiescovering forklift trucks and brick trucks which had cranes mounted on the


tabletop. When asked how he had responded to requests for withdrawal of Athe endorsement he said that he had informed the intermediaries that theendorsement was required, discussed the matter with them and tried todirect them to a specialist underwriter. When asked why he had insistedupon the endorsement he said:

“You can appreciate these are fairly sophisticated pieces ofmachinery better directed to an underwriter that is prepared to give thatoverturning cover or if it is unregistered [directed to] specialist Bengineering underwriters.”

He acknowledged that it was possible that the appellant would not insistupon the endorsement but would merely require payment of an additionalpremium and an increased excess. He added:

“In determining whether or not to insist upon the endorsement, Iwould have taken into account the amount of insurance whichCommercial Union had for the particular insured, their past years Cclaims experience and most important the support and amount ofinsurance business placed with Commercial Union by the particularbroker.”

He then said that the standing of the agent with the appellant was not suchthat it could have succeeded in securing the withdrawal of the endorsement.

However Mr Green was leaving the industry and a broker, Hemms Cassell& Associates Pty Ltd, was commencing to take-over insurance renewals and

Dnew insurance business on behalf of the insured. The broker renewed theinsured's motor vehicle insurance with the appellant as from 4 July 1987.Thereafter as other insurances were required or fell due for renewal thearrangements were handled by the broker on behalf of the insured.Mr Hughes said that if Hemms Cassell had applied for the withdrawal of theendorsement: “I would reluctantly have agreed but would have insisted uponadditional premium and a higher excess.” It is this additional premium andhigher excess that were allowed by way of set-off or abatement by the trial Ejudge.

The trial judge accepted the evidence of Mr Hughes which he said was insubstance unimpaired by cross-examination.

In the light of these findings his Honour concluded that where on theevidence, the appellant would have been prepared, albeit unwillingly, toprovide cover without the endorsement had the approach been madethrough a broker of good standing he should conclude that the prejudice to Fits interests as a result of the insured's failure to notify the registration of thecrane was not that it remained on risk in relation to damage to the cranefrom overturning, but that it remained on that risk without having receivedthe additional premium or imposed the increased excess. His Honourconcluded (at 75,812-75,813):

“… That is the real extent of its damage and the real measure of itsdamages. Any other conclusion would mean that the extent of the

Gprejudice to [the appellant] turned upon how persistent [the insured]would have been in its enquiries of [the appellant] and whether or not ithappened to employ the appropriate broker, and not for any reasonconnected with the nature of the risk or the terms on which [theappellant] was prepared to provide cover.”

There is no direct evidence which fixes the date when the insured first


consulted the broker. Despite the evidence of Mr Hughes (which would haveAbeen available in statement form before the trial) no evidence was called inreply from the insured or from the broker to establish exactly when theinsured first consulted the broker, how the broker came to be consulted orthat the broker would have been consulted earlier had problems arisen withregard to the insurance over the registered crane. Mr Green was not cross-examined on these matters either.

On 5 May, Mr Green had received a registered letter dated 30 April fromBthe appellant rejecting the agent's application for appointment as one of itsinsurance agents and terminating an earlier informal arrangement to thateffect. The agent thereby lost any capacity to act as an insuranceintermediary with the appellant. After receiving this letter Mr Green spoketwice to a Mr Robinson, the relevant executive of the appellant in anunsuccessful attempt to have the decision reversed. By 11 May at the latestMr Green knew that his company could no longer write any new business

C with the appellant. He said that his company ceased writing business thatmonth.

Mr Green was recalled at the very end of the oral evidence. In cross-examination by senior counsel for the insured he said that after the appellanthad terminated its agency he would have responded to information fromMr Ferrarese that the crane was about to become registered by taking stepsto insure the crane with Mercantile Mutual. In re-examination he said that if

D he had done so his company would have received commission fromMercantile Mutual.

There is no evidence which establishes whether Mercantile Mutual offeredcover over registered mobile cranes or on what terms. Mr Ferrarese gave noevidence as to the attitude he would have taken had Mr Green suggestedthat cover be taken out with Mercantile Mutual. However there is no reasonfor concluding that he would have rejected such advice.

This Court can safely conclude that after 11 May, Mr Green would notEhave secured cover from the appellant for this crane without theendorsement. Either he would not have approached the appellant at all or ifhe did he would have failed to secure such a policy. There was no reason forMr Hughes to do any favours for Mr Green after 11 May. In particular therewas no reason why this reluctant underwriter should volunteer informationto Mr Green that a broker with sufficient market power might succeed insecuring a policy from the appellant without the endorsement.F

The obligation of the insured under general condition 1(a) was to notifythe appellant “as soon as possible”. Mr Ferrarese having informedMr Green on 7 May of the pending registration, it became the agent's dutyto notify the appellant of the change and make arrangements for freshinsurance. Even if Mr Green had attempted to place the new business withMercantile Mutual he should still have given notice to the appellant withoutdelay to prevent the insured having double insurance and incurring

G unnecessary premium costs. There is no suggestion that Mr Green wasoverworked and it can be safely inferred that notice could and should havebeen given within a week. On the trial judge's finding the appellant wouldhave reacted by giving notice to cancel the policy. Such a notice could readilyhave been given within a week, that is, by about 21 May. It is at this pointthat the difficulties in the case really arise. Mr Green was still handling


insurance matters on behalf of the insured. The trial judge accepted his Aevidence “that even after 5 May 1987 had he been told of the registration ofthe crane he would have taken steps to arrange an appropriate policy”. Thebroker was not yet in the picture. Accordingly it was Mr Green who wouldhave had the responsibility of obtaining appropriate cover for the crane as aregistered motor vehicle.

There is no suggestion that Mr Ferrarese would have approached theappellant direct. When Mr Green ceased to handle insurance business BMr Ferrarese engaged the broker and did not attempt to arrange thebusiness direct.

Mr Hughes said that the specialist underwriters in this class of businesswere the GIO and the NRMA.

Given the trial judge's finding that Mr Green would have continued to actfor the insured after 7 May it is, in my opinion, a matter of speculationwhether he would have succeeded in arranging new insurance and if so with Cwhich underwriter and on what terms. It is also a matter of speculationwhether Mr Green would have failed to do so and whether this would haveresulted in Mr Ferrarese consulting Hemms Cassell earlier than he did.

The first written communication from the broker on behalf of the insuredwas received by the appellant on 31 July and related to the renewal of itsmotor vehicle insurance. The initial proposal sought renewal from 15 Junebut later, for some reason not clarified in the evidence, renewal was sought Dfrom 4 July. The proposal was accompanied by an undated written authorityfrom the insured appointing Hemms Cassell & Associates as its broker.

As I have already said the insured made no attempt to prove that it couldand would have obtained cover for this mobile crane without theendorsement by pursuing the course that Mr Hughes said would alone haveachieved that result.

In my opinion the Court should not draw inferences favourable to the Einsured on these matters when no attempt was made to prove them by directevidence and in particular when no relevant questions were asked ofMr Ferrarese. Rather it seems appropriate to apply the principles of Jones vDunkel (1959) 101 CLR 298.

There appears to be no Australian authority which extends the principlesof Jones v Dunkel to a case where a party fails to ask questions of a witnessin chief. However I can see no reason why those principles should not apply Fwhen a party by failing to examine a witness in chief on some topic, indicates“as the most natural inference that the party fears to do so”. This fear is then“some evidence” that such examination in chief “would have exposed factsunfavourable to the party”: see Jones v Dunkel (at 320-321) per Windeyer J.Moreover in Ex parte Harper; Re Rosenfield [1964-5] NSWR 58 at 62,Asprey J, citing Marks v Thompson 1 NYS 2d 215 (1937) at 218, held thatinferences could not be drawn in favour of a party that called a witness who

Gcould have given direct evidence when that party refrained from asking thecrucial questions.

There is in fact extensive case law in the United States on this questionalthough it is not referred to in Wigmore, Evidence, 3rd ed (1940). It may befound summarised in 5 ALR 2d, par 25 at 949-951. One of the leading casesis Milliman v Rochester Ry Co 3 App Div 109; 39 NYS 274 (1896), a decision


of the Appellate Division of the Supreme Court of New York. The judgmentAof the Court was given by Follett J who said (at 276):

“In case a litigant fails to produce a person known to be friendly tohim and to his cause, who is so situated that he must have knowledge ofthe facts in issue, the jury is permitted to presume that the testimony ofthat person would not have been favourable to the party … Theexistence of this rule is not disputed but it is urged that it is notapplicable to this case because the daughter was produced as a witness,Band that no presumption arises from the plaintiff's failure to interrogateher, that her testimony would have been unfavourable to him. I thinkthe rule is as applicable to a case in which a party fails to interrogate afriendly witness, so situated as to be presumed to have knowledge of theexistence or non-existence of the vital facts in issue, as it is to the case ofa failure to produce such a witness. Indeed I think the omission tointerrogate a friendly witness in respect to facts presumably within his

C knowledge is more significant than the failure to call such a person as awitness, and that the presumption that the testimony would not havebeen favourable to the party's case is stronger than the one which arisesfrom the failure to produce such a person as a witness.”

The insured had no realistic option of leaving the crane unregistered.Mr Stenner, the driver, gave evidence that from about a week after the cranereturned from Canberra he drove it “approximately every day” from theinsured's yard to a building site to do work. The insured would not haveDwished to lose the opportunities for the profitable hiring of the crane as aregistered vehicle. Moreover Mr Ferrarese did not say in evidence that hewould have de-registered the mobile crane if the appellant had refused towithdraw the endorsement.

There is a further difficulty. The trial judge said (at 75,812):“… Cover against loss or damage through overturning is clearly a vitalaspect of the cover required for a crane, and I decline to conclude theEFerrcom would have done nothing.”

In my opinion the trial judge fell into error in drawing the inference thatthe endorsement would not have been acceptable to the insured. Counsel forthe insured did not ask Mr Ferrarese about this matter either in chief or inreply and did not cross-examine Mr Green on the matter either. Moreoverthe insured did not call any representative of the broker to establish whatview the broker would have taken and what advice it would have givenFMr Ferrarese. In these circumstances I do not consider that inferencesshould be drawn favourable to a party whose counsel refrained from askingany question on this topic. Again it appears to me that the principles earlierreferred to derived from Jones v Dunkel and the decision of the AppellateDivision of the Supreme Court of New York in Milliman v Rochester Ry Coare applicable, and indeed the proper inference is to the opposite effect ofthat drawn by the trial judge.

G This conclusion is confirmed by evidence in the appellant's caseconcerning the insurance arrangements made by the insured before and afterthe casualty in relation to other registered mobile cranes. On 31 July 1987,the appellant received from the broker a proposal for fleet motor vehicleinsurance. The schedule of motor vehicles which accompanied this proposalincluded four mobile cranes as follows:


A“Cranes EXCESS14 INTERNATIONAL 11

TON KATO CRANE JPL 429 $500 THIRD PARTY ONLY15 MACK 30 TON CRANE GPH 517 $500 ” ” ”16 LINMAC 18 TON

TRACTOR CRANE LBQ 103 $500 ” ” ”17 BHB 10 TON

TRACTOR CRANE HDQ 754 $500 ” ” ””B

The insured therefore did not propose for, or receive, any cover againstthe risk of loss or damage to such cranes but was content to protect itselfonly against third party property damage. It follows, of course, that theinsured was not covered against the risk of damage to such cranes fromoverturning.

Approximately a year later, 31 July 1988, the appellant received from thebroker a letter requesting the renewal of the insured's commercial motor

Cvehicle policy. Items 12 and 13 referred to in the letter for which renewedcover was requested were as follows:

“Item No Vehicle Reg No Cover Excess12 International 11 Ton MIG 508 Comprehensive )

Kato Crane $50,000 $500)13 Mack 30 Ton Crane GPH 517 Comprehensive )

$100,000 $1000) ”D

On or about 2 November, the renewed policy issued. It providedcomprehensive cover over the two cranes but subject to the endorsement.The broker did not attempt to secure the removal of the endorsement.

This evidence indicates that even after the mobile crane in question hadoverturned at Darling Harbour in September 1987 and the appellant hadrejected the insured's claim arising from that casualty, the insured and itsbroker were still willing to accept cover over registered mobile cranes with Ean endorsement excluding liability for damage by overturning.

The mobile crane the subject of these proceedings had a maximum liftingcapacity of 44 tons. The next largest mobile crane owned by the insured notcovered against the risk of overturning was the registered 30 ton Mack cranereferred to in the 1987 and 1988 policies. In the absence of any evidencedirected to the point I am unable to conclude that any relevant distinctionshould be drawn between the overturning risks in respect of these cranes.

The only distinguishing feature relied upon by counsel for the insured at Fthe hearing of the appeal was that the 44 ton crane was subject to a leasefrom United Finance Credits Pty Ltd during the 1987 and 1988 years and theinterest of that company was noted on the policies. The policies covering the30 ton Mack crane were not expressed to cover the interest of any financierand inferentially therefore the insured was the absolute owner of that crane.It was submitted that the insured had an obligation under the lease to insurethe 44 ton crane but had no such obligation in relation to the mobile cranescovered by the motor vehicle policies. The lease over the subject mobile Gcrane was not tendered and the only evidentiary foundation for thesubmission is the following passage in Mr Ferrarese's written statementwhich was admitted without objection:

“The mobile crane was acquired by the plaintiff by way of Leasethrough HFC Finance. I also believe that it was a term of the Lease thatthe mobile crane be insured.”


The reference to HFC Finance appears to be a typographical error forAUFC Finance. This is a statement of Mr Ferrarese's belief. The decision inJones v Sutherland Shire Council [1979] 2 NSWLR 206 establishes thatevidence admissible for a limited purpose which is admitted withoutobjection is not available for any other purpose. In the present caseMr Ferrarese's belief was relevant to explain why some mobile cranes wereinsured against loss or damage and not others.

However the 44 ton crane would still have been insured if it were coveredBby the appellant's commercial motor vehicle policy even though that policywas subject to the endorsement. It is possible that the acceptance of coverwith such an endorsement would have been a breach of the particularinsurance clause in the lease. However the lease was not tendered andMr Ferrarese did not give any evidence on that question. In thesecircumstances, in my opinion, the Court cannot properly infer thatMr Ferrarese would have rejected insurance with that endorsement because

C of his knowledge or belief that such insurance would have been a breach ofthe insured's obligation under the lease.

The appellant adduced the evidence relating to the 1988 insurance coverfor the two registered mobile cranes. It was admitted without objection. Thisevidence was admissible only because it tended to establish what probablywould have happened in 1987 if the insured had been offered cover for the44 ton mobile crane under the appellant's registered motor vehicle policy

D with the endorsement. The insured's only answer in the evidence was thestatement by Mr Ferrarese about the obligation to insure that crane underthe lease. In these circumstances I see no reason to treat the 1988 evidenceas either irrelevant or as of little or no weight in assessing the probabilities inrelation to the 1987 insurance.

In my opinion the evidence of Mr Hughes established that but for theinsured's breach of general condition 1(a) in the policy it would have goneoff risk under this policy. It established that it would not have withdrawn theEendorsement and accepted the overturning risk if approached by the insureddirect or by the insured's agent. At this point the trial judge, correctly if Imay say so, concluded that it was uncertain whether the insured would haveinstructed the broker who would have pressed for and obtained the reluctantassent of the appellant to the removal of the endorsement. While the legalonus of proof, in general, was on the appellant it would not be just or inaccordance with principle to hold that, because of this uncertainty, theF appellant failed to establish any greater loss than the additional premiumand excess.

The uncertainty relates to what the insured and its agent or broker wouldhave done in the hypothetical situation and the importance or otherwisewhich the insured and its broker would have attached to the endorsement.

As I have already held the appellant in attempting to establish the“amount” of its set-off under s 54 is in the position of a plaintiff seeking

G damages.In my opinion the appellant established a prima facie case that, but for the

breach of condition, it would not have been on risk at all for this casualty,and therefore its damages were equal to the amount of the claim. Theinsured is really in the position where it is attempting to cut down this primafacie case. The trial judge has held that the insured succeeded in doing so,


although it called no evidence on this issue. Moreover Mr Hughes' evidence Aas to what would or might have happened if the broker pressed for theremoval of the endorsement merely indicated that the insured had a chanceof obtaining unrestricted cover. The trial judge in effect held that this chancewas a certainty and reduced the appellant's damages. However he did sowhere the insured called no evidence to establish the extent of the chance orthat it would in fact have been a certainty.

The present problem is analogous to that which occurs in personal injury Bcases where a defendant alleges that the plaintiff's prima facie measure ofdamages should be reduced because of some pre-existing condition orsupervening illness. In such a case, while the legal onus remains on theplaintiff, the defendant has the burden of introducing evidence on the issue.The relevant principles are those stated in Purkess v Crittenden (1965) 114CLR 164 at 168, where the majority, in a joint judgment, said:

“… it is not enough for the defendant merely to suggest the existence ofCa progressive pre-existing condition in the plaintiff or a relationship

between any such condition and the plaintiff's present incapacity. …both the pre-existing condition and its future probable effects or itsactual relationship to that incapacity must be the subject of evidence …which, if accepted, would establish with some reasonable measure ofprecision, what the pre-existing condition was and what its futureeffects, both as to their nature and their future development andprogress, were likely to be.” D

In the present case the insured failed to adduce any evidence in answer tothe prima facie case established by the appellant.

Both in principle, and on the authority of Purkess v Crittenden, it cannot beenough for the insured “merely to suggest” that something would havehappened to reduce the appellant's damages. The matters relied upon shouldhave been the subject of evidence which, if accepted, “would establish withsome reasonable degree of precision” what would have happened. E

No unfairness results to the insured from applying these principles. Theappellant gave evidence as to what it would have done had general condition1(a) been complied with. The insured then failed to adduce evidence as towhat it would have done in those circumstances. The relevant facts werepeculiarly within its own knowledge and in the absence of evidence whichsatisfied the standard referred to in Purkess v Crittenden in my opinion theprima facie measure of damages established by the appellant's evidence Fshould stand.

Although the question was not argued it may be that the true principlebeing invoked by the insured was that of mitigation of damage. In that casethe legal onus of proof would be on the insured: see Watts v Rake (1960) 108CLR 158 at 159 per Dixon CJ. It would be a most unusual type of mitigationbut the apparent difficulty in recognising it arises because the appellant didnot become aware of the breach until after the casualty, yet its damages must

Gbe assessed by reference to the difference between its actual positionfollowing breach and its hypothetical position if the insured had compliedwith the condition.

The appellant established a prima facie case that its loss was equal to thevalue of the claim because but for the breach it would have been off riskunder the policy. The insured's answer was that the appellant's true loss was


not the value of the claim because, if there had been no breach, it wouldAhave gone on risk under another policy. This would have avoided the wholeof the appellant's loss from the breach of the first policy (liability to pay theclaim) and established that its true loss was the loss of benefits under thenew policy on which it would have been liable. It may be that the insured'sanswer is one of confession and avoidance. It seems to me that if this is not acase of true mitigation, it may well be sufficiently analogous to attract to theinsured the legal burden of proof. It is, of course, well established that anopportunity of mitigation may arise as a result of some offer or action by theBparty in breach: see Payzu, Ltd v Saunders [1919] 2 KB 581. I express noconcluded view on these questions.

The proper conclusion on the evidence is that the appellant proved thatbut for the breach of condition it would not have been on risk at the time ofthe casualty. In my opinion, the appeal should be allowed and the insured'sclaim against the appellant should be dismissed. I agree with the ordersproposed by the President.

C Appeal allowed

Solicitors for the appellant: A R Conolly & Co.

Solicitors for the first respondent: Lamrocks (Penrith), by their Sydneyagent, Duncan Barron & Co.

Solicitors for the second respondent: H M Symonds & Britten(Parramatta).

DN J HAXTON,

Barrister.

E

F

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