1999 policy - non-disclosure and misrepresentation
647 QBE disputes liability under the 1999 policy on the grounds of non disclosure and misrepresentation. The insured's duty of disclosure is prescribed by s 21 of the Insurance Contracts Act as follows:
'(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.
(2) The duty of disclosure does not require the disclosure of a matter:
(a) that diminishes the risk;
(b) that is of common knowledge;
(c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
(d) as to which compliance with the duty of disclosure is waived by the insurer.
(3) Where a person:
(a) failed to answer; or
(b) gave an obviously incomplete or irrelevant answer to;
a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.'
648 In summary, the insured must disclose every matter which is known to him or her if:
· he or she knows it to be relevant to the insurer's decision; or
· a reasonable person, in the circumstances, could be expected to know that it was so relevant.
QBE must prove these matters.
649 Sections 23 to 27 deal with misrepresentations, but they seem to assume an existing duty not to misrepresent, rather than create such a duty. It is not necessary to refer to them. Section 28 provides:
'General insurance
(1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a) failed to comply with the duty of disclosure; or
(b) made a misrepresentation to the insurer before the contract was entered into;
but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.'
650 QBE's case is that, but for the alleged non-disclosure and misrepresentations, it would not have extended cover for 1999-2000. In other words it seeks to establish that MDRN's non-disclosure and/or misrepresentations led to its decision to insure.
651 In considering this aspect of the case, it is necessary to address a further body of evidence. Ms Hume is an employee of QBE. She holds the degree of Bachelor of Commerce in the University of Queensland and has completed some law subjects in that university. Following a period of training with QBE, Ms Hume commenced work as an underwriter in the professional liability division. By August 1998 she had been promoted to the position of senior underwriter and was, in 1998, appointed to manage the professional liability division in Queensland. She moved to Brisbane in early 1999. At the end of 1999 she resigned from QBE and travelled to London where she again worked for QBE in establishing a professional liability division. She has since returned to Australia and continues to work for QBE.
652 Ms Hume first became involved with MDRN in late August or early September 1998 through MDRN's insurance broker, AON Risk Services Australia Ltd. QBE had carried MDRN's professional indemnity insurance in connection with its mortgage business since 1998. It did not otherwise insure the firm. Ms Hume assessed MDRN's proposal for insurance for the 1998-1999 year. In so doing, she primarily considered:
· MDRN's claim history, as at the last renewal and currently;
· gross fee income for either the last twelve months or the last financial year, whether there had been any increase or decrease as compared to the corresponding period and any reasons for such increase or decrease; and
· the quality of the risk, and whether the nature of the risk had changed substantially since the last renewal.
653 MDRN's proposal was made on a broker's proposal form rather than the form generally used by QBE at that time. The QBE form sought details of the precise nature of the insured's activities or business, advice given in relation to such activities or business, any envisaged substantial changes in such activities, and whether any brochures or other promotional material were issued, in which case copies would be requested. I understand this evidence to have been led in support of the evidence from Ms Hume that such matters were relevant to her decision to insure MDRN.
654 In assessing the quality of the risk, Ms Hume considered that any changes or proposed changes were of some importance, primarily because they might affect the relevance of the past claims record. In this case she concluded that there had been a substantial change in the risk since the 1997-1998 renewal in that MDRN had established MDRN Investments Ltd to manage property syndication. That company was not insured by QBE. MDRN anticipated a 32 per cent increase in fee income and an increase in the percentage of its business which related to mortgages. Ms Hume recommended a 10 per cent increase in the premium. She also recommended that the new policy:
· exclude cover for MDRN's legal practice;
· be limited to mortgage management and origination work;
· not cover advice in respect of joint venture development projects; and
· not cover the operations of another company, National Mortgage & Development Ltd.
655 Ms Hume then referred the proposal and her recommendations to the national underwriting manager, Mr Hunter. He approved Ms Hume's recommendations, with some variations. On 24 September 1998 the policy issued, 'limited to cover mortgage assessment, mortgage management/origination work and property syndication only'. This cover was slightly broader than that recommended by Ms Hume and extended to other entities which are not presently relevant.
656 Ms Hume also considered MDRN's proposal for the 1999-2000 year. By that time she had moved to Brisbane and had authority to accept the proposal. MDRN indicated that from 1 November 1999, ASIC was to assume responsibility for the regulation of solicitors' mortgage practices, which activities had previously been regulated by the Queensland Law Society (Inc). Ms Hume concluded that the risk remained substantially unchanged. The premium was increased by 15 per cent to reflect an increase in fee income. The 1998 endorsements were applied to the 1999 policy. There were also exclusions in relation to the partners' family trusts. Renewal was effected on that basis.
657 Ms Hume considered that the business practices of an applicant for professional indemnity insurance were directly relevant to the decision to insure. This was because such insurance was in connection with the conduct of professional business practices. In assessing MDRN's proposals, Ms Hume relied on information provided by MDRN regarding such business practices, including brochures and other promotional material used by it in the mortgage business. The fact that such business was conducted in conjunction with the MDRN legal practice was relevant to her considerations. She noted that MDRN had 'aggressively promoted itself', by which she meant that it had promoted its mortgage business as an adjunct to its legal practice. Her decision to accept the proposal for the 1999 policy was 'significantly influenced by the fact that the mortgage lending business was backed up by an apparently reputable firm of solicitors and, particularly, the experienced partners of the firm.' To her mind, the understanding of legal risks brought to the business 'additional knowledge that comes from a legal understanding of these types of transactions'. She said that:
'In my experience, usually solicitors have a high level of honesty and integrity as qualified professionals, while this was not necessarily always the case with respect to financiers and loan scheme promoters.'
658 Ms Hume considered that lawyers would generally exercise more diligence, be more likely to structure the arrangements appropriately and comply with the requirements of the law, thus reducing the risk to QBE.
659 Ms Hume noted that MDRN's promotional material described the risk minimisation strategies employed by MDRN to safeguard investors' funds. As lawyers, MDRN would have known that representations made to the public in promotional material could lead to consequences in the event of any misleading or deceptive conduct. She accepted at face value representations made by MDRN regarding its business activities. She considered that the promotional material stressed the involvement of the legal practice and the partners in assessing proposed loans. In particular, Ms Hume concluded that:
· the MDRN private mortgage team, headed by partner Philip Ryan, was expert in private mortgage lending;
· the mortgage business was backed by a long-established and respectable legal firm;
· MDRN's mortgage business had an unblemished track record and strove continually to provide a low risk, quality service;
· an experienced investment team carefully assessed all loans and did not "equity lend";
· all loans were carefully assessed by staff who had extensive experience in legal and banking spheres;
· the loan assessment procedure was strict;
· persons with legal and banking experience examined material which included:
· a full property valuation by an acceptable valuer;
· financial statements of the borrower;
· financial statements of directors and guarantors, where applicable;
· satisfactory searches; and
· credit checks;
· as Mr Ryan was the only lawyer mentioned as a member of the team, he would undertake the assessment role in conjunction with Mr Blackadder;
· MDRN's mortgage business was backed by the legal firm, providing legal security and certainty to investors;
· MDRN had solicitors' fidelity insurance and professional indemnity insurance;
· funds were to be placed in the solicitors' trust account; and
· responsibility for approving all loans rested with Philip Ryan and the partners of MDRN, together with Mr Blackadder.
660 Ms Hume identified a number of 'scenarios', apparently to demonstrate the ways in which knowledge of various matters may have affected her decision to insure MDRN for 1999-2000. Firstly, she addressed her understanding that, in reality:
· the partners relied entirely on Mr Blackadder to evaluate loan applications, security valuations, financial information and supporting documentation;
· they only read the investment summary and did not, themselves, check the correctness of representations, or strength thereof; and
· investors were not provided with loan application source material unless they requested it.
661 Ms Hume said that had she been aware of these matters, she would not have renewed the policy for 1999-2000 because:
'Firstly, the named insureds were the partners of the law firm and not Dale Blackadder. He was their employee. The responsibility for the loan recommendations rested with the partners and in my view they could not have verified the information contained in the Investment Summary and ought not have endorsed the strength of the recommendation to investors without at least one of the partners reading and understanding the loan application source material. This absence of review would give a distorted picture of the assessment and it would have been unacceptable to me for the partners to just look at the Investment Summary as the sole basis for ascertaining the virtues of each loan. The lack of partner involvement would have been unacceptable to me notwithstanding Mr Blackadder's level of experience as a banker. Mr Blackadder's experience did not derogate from the limitations, namely that Mr Blackadder did not have a financial stake in the business and had no legal qualifications.
Secondly the information … does not conform to the representations and my understanding of them, referred to in [the documents supplied by MDRN]. Had the information … been disclosed to me, I would have been very concerned that MDRN had misrepresented to investors the role played by the law firm and, in particular, Mr Ryan, in the loan assessment process. Not only does this go to the nature of the risk that QBE was underwriting, but also the moral risk in terms of MDRN's ethics and integrity. I would not have been prepared to underwrite an insured that appeared to misrepresent their business practices in this fashion to potential clients.
In summary, there was a combination of a lack of control and supervision and that MDRN were actually assessing the loans in a different way to that represented to the investors and QBE.'
662 These statements are, to some extent, difficult to accept. Generally speaking, I cannot see that legal training has much to do with considering and approving a loan application. After all, one knows from common experience, and can infer from Mr Blackadder's evidence, that loans are regularly approved by financial institutions using the services of persons who are not legally qualified. The primary role for a legally qualified person in connection with such matters is to attend to the security documentation. Mr Ryan was responsible for that. The only necessary legal knowledge in assessing this loan application was in connection with the concepts of joint ownership of assets and trusts. In my view, few people with rudimentary business experience would lack an understanding of those concepts. I have previously indicated that I consider that Mr Blackadder must have understood them.
663 Ms Hume also seems to have thought that solicitors would have a better understanding than an experienced banker of the dangers of misrepresentation. Such dangers must be well-known to most people in business. The argument would lead to the conclusion that all commercial public relations must be checked by lawyers. I do not accept that basic questions of factual accuracy and honesty are matters with which lawyers enjoy any peculiar affinity. I also reject the suggestion that lawyers are more likely to be aware of the importance of being truthful and accurate in promotional material. It was reasonable for the partners to rely upon Mr Blackadder to compile the investment summary. In business it is common for senior personnel to rely upon executive summaries provided by subordinate employees whom they trust. There were good reasons for their trusting Mr Blackadder. He was a senior employee with substantial relevant experience.
664 It is not really correct to assert that Mr Blackadder was not supervised. Mr Ryan said that he had regular, virtually daily, discussions with him. He saw investment summaries before they were distributed. He had adequate opportunity to check them against information sources if he considered that necessary. I have no doubt that Mr Ryan and Mr Blackadder both understood that the former was supervising the latter. Mr Blackadder was, in a practical sense, responsible for deciding whether to proceed with loan proposals, but Mr Ryan had the authority and opportunity to overrule him.
665 There has been a tendency in this case to treat MDRN (and Mr Blackadder) as having the responsibility for deciding whether or not to lend to potential borrowers. In fact MDRN, through Mr Blackadder, decided only to market a particular loan proposal. Mr Ryan and Mr Blackadder's evidence and the letter approving this proposal (ex 1, tab 22) demonstrate that there was no commitment to lend at the time at which the investment summary was issued. In fact, individual investors decided whether to lend. This tendency has, to some extent, unduly influenced the conduct of the case. It is really about how MDRN canvassed for funds, not about how it decided whether to lend. That does not detract from the seriousness of Mr Blackadder's misconduct, but it is an important aspect of the relationship between Mr Ryan and Mr Blackadder.
666 Had Mr Ryan been asked whether he supervised Mr Blackadder's work, he would have said that he did. That would have been an honest answer. Ms Hume, with the benefit of hindsight, may consider that such supervision was inadequate, but the question is whether there was relevant non-disclosure or misrepresentation. People are usually unaware of their own neglect, at least until it produces unfavourable results.
667 I do not fully understand Ms Hume's concern about the fact that investors would only be shown loan application source material if they asked to see it. That would hardly be a matter of concern if the information in the relevant investment summary was accurate. Perhaps the relevance of this matter depends upon acceptance of the assertion of lack of supervision.
668 In scenario 2, Ms Hume dealt specifically with the ten point plan contained in the autumn 1999 newsletter, the winter 1999 newsletter and alleged differences between the content of these documents and Mr Blackadder's actual practice. Although the applicants plead reliance on the winter 1999 newsletter, they did not ultimately rely on it. I have therefore not previously outlined its content. As far as I am aware, it is only relevant to this aspect of the case. Relevant statements appear to be that:
· MDRN did not "equity" lend, that is 'automatically approve a loan if it is less than 70% of the valuation of the property concerned'; and
· 'Loans Manager Dale Blackadder conducts full checks for every prospective borrower and no loan is approved unless it meets our Ten Point Assessment Plan (see the Autumn 1999 Newsletter).'
669 There is also a derogatory reference to other organizations which 'don't examine the financial history of the borrower, their current financial capacity, nor their commitments. Nor do they run credit checks against the borrower and guarantors.'
670 My earlier comments concerning the descriptive effect of the autumn 1999 newsletter (as opposed to the prescriptive effect urged by the applicants and cross-respondents) apply to the winter 1999 newsletter.
671 Ms Hume observed that there was no system in place for reviewing documents prepared and issued by Mr Blackadder. She considered that MDRN should have reviewed a cross-section of loans, checking compliance with the ten point plan. She said that had MDRN disclosed the absence of such an audit system, QBE would not have issued the 1999 policy. She said that such a practice was followed in QBE's office. However that can hardly be a basis for assuming that all businesses followed it. It is difficult to see any reason for disclosing the absence of such a system unless there was some reason to believe that QBE understood that it existed. I see no reason why Ms Hume would have assumed the existence of such a practice. If it were so important, one might have expected an appropriate question in the proposal form. Ms Hume did not suggest that QBE's proposal form contained such an inquiry. There was no evidence that such a practice was common in the finance industry. In any event, in such a small undertaking, Mr Ryan's ongoing contact with Mr Blackadder could have been as effective a means of supervision as that proposed by Ms Hume.
672 Scenario 3 related specifically to the Yandina project and the contents of the investment summary. I have already identified the aspects of the investment summary about which valid complaint might be made by the applicants. They are:
· the asset positions of Mr Rivett and Prospect Results; and
· the assertion that all units in Stage 1 had been pre-sold.
673 Such matters, if known to MDRN, should have been disclosed. Ms Hume also identified other matters of concern, including:
· the failure to comply with the ten point assessment plan;
· other aspects of Mr Rivett and Project Results' finances and the capacity to meet loan commitments, including interest payments;
· absence of an independent valuation;
· absence of a check valuation;
· acceptance of trade dollars in part payment for units;
· sale of units at prices below $85 000;
· negative cash flow for Stage 1;
· use of trade dollars in meeting development costs; and
· borrower's contribution of its own funds.
674 Mr Hume claimed that QBE would not have accepted the 1999 proposal if these matters had been disclosed. I accept that non-compliance with the ten point plan, as previously notified to some investors, was a matter which may have been relevant to the risk to be undertaken by QBE. However, for reasons which I have given, I consider that the effect of the ten point plan has been greatly overstated by the applicants. QBE's reliance on it for present purposes also depends upon a certain degree of over-statement. I will return to this matter at a later stage.
675 I have given my reasons for rejecting the applicants' complaints concerning the valuation, the use of trade dollars and Project Results' ability to meet interest payments. Those reasons lead to the conclusion that no question of disclosure arose in connection with those matters. As to the alleged negative cash flow for Stage 1, the borrower was to meet loan repayments from the proceeds of sale of units, with an expected shortfall of $400 000. This was disclosed. The point concerning the borrower's contribution of funds is part of the trade dollar complaint. The only other point is the suggestion that units were sold for less than $85 000. To the extent that this allegation concerns some issue other than the acceptance of trade dollars, I do not understand its factual basis to have been ventilated during the trial. It was not addressed in submissions. I take it to be abandoned.
676 Ms Hume was cross-examined concerning her knowledge of the activities undertaken by MDRN in connection with the mortgage business. She said at TS 2251
'My understanding is that they, as I said before, that they were - they introduced investors to different investment opportunities and that, I guess, as part of that they would have to ensure that there was the validity of the investment opportunity, so they would, presumably, perform checks of some description in terms of it was in relation to investing in a property and the property was adequately valued.'
677 This seems to assume a "free-standing" duty of care rather than a duty not to engage in misleading or deceptive conduct or make negligent statements. At 2251-2 she was asked whether she understood such activities to be of a 'banking nature'; and whether she understood that people with the skills of a banker or 'allied skills' would perform them. She replied at 2252:
'Yes, I understand that they would be involved in that process, but the documentation and other aspects as to the structure of transactions possibly would be done out of - by somebody else.'
678 She was asked:
'… would it be fair to say that in '98 and '99 you recognised this dichotomy for a mortgage origination there would be, on the one hand, the commercial aspects that would be a matter for assessment (by) a person with banking skills, and on the other hand, the transactional aspects, for example, proper documentation of the loan and affecting of the mortgage, which would be in the hands of persons with appropriate skills, including legal skills, to do that?'
679 She agreed. It was pointed out to Ms Hume that in a proposal for insurance made in 1996, MDRN had informed QBE that proposed loans were evaluated externally by 'the Finance Division of the Brannelly Group (Brannelly Finance Pty Ltd), a long established and highly respected superannuation and estate planning consultancy who also act as managers of lawyers private mortgages.' It was said that Brannelly examined the debt-servicing capacity and good credit history of each applicant and obtained a valuation of the security property to ensure that that the loan/security ratio did not exceed 70 per cent. Ms Hume referred to the 1996 proposal in fixing the premiums for the 1998 and 1999 policies and noted the reference to external evaluations. It seems unlikely in that context that she would have assumed that assessment of proposed loans was done by lawyers. See ex 77. Similar information was supplied to QBE in 1997. See ex 78. Under the heading 'The Evaluation Procedure' it was said that:
'The evaluation of applicants is provided by experienced professionals who have had extensive banking experience.
They examine the debt service capacity and good credit history of each applicant and obtain a valuation of the security property to ascertain that the loan/security ratio does not exceed 70 %. This is set by the Queensland Law Society.'
680 Ms Hume said that the change from external to internal assessment did not lead her to vary the premium for 1998 and following years. Exhibit A to Ms Hume's affidavit is the 1998 proposal. Attached were documents sent to investors. In one document it was said that:
'The evaluation of applicants is provided by experienced professionals who have had extensive banking experience.'
681 Ms Hume agreed that she was not concerned about whether a valuation was performed internally or externally, provided that there was a proper evaluation process. At TS 2289 the following questions and answers appear:
'Q: And the relevant point of inquiry was that the person performing the evaluation was somebody with the appropriate banking experience?
A: I do believe that there was - in the other attachments it actually may mention other than banking experience, but that they had relevant experience was important.
Q: And that included banking experience?
A: For purposes of this, this is a document that indicates that they had banking experience. I believe elsewhere it also states legal experience, in one of the other documents.
Q: But for the purpose of the risk you were considering underwriting, banking experience was important?
A: It was considered, yes, as an aspect of its, yes.
Q: And, indeed, where it talks about there, they examined the debt service capacity and a good credit history, you certainly wouldn't have expected solicitors to be making those sorts of evaluations. You thought that was a matter properly performed by people with banking skills. Correct?
A: I didn't assume that it was performed by a certain person that had banking experience.
Q: Well, can I suggest to you that when you read what appears under the evaluation procedure, it's inescapable that the persons performing it for MDRN are persons with banking experience?
A: It indicates that, yes.
Q: All right. So you were certainly content to recommend underwriting the risk on the basis that loan applications were evaluated by people with banking experience?
A: Evaluated?
Q: Yes.
A: That's - only as to the aspect of evaluated, yes.
Q: But you don't understand any difference between the expression "evaluated" and "assessed" in this context do you?
A: Evaluated and assessed? No.
Q: So if it had said the assessment procedure, "The assessment of applicants is provided by experienced professionals who have had banking experience", that wouldn't have changed your attitude to it. Correct?
A: No.'
682 In this same document it was said that:
'(a) We have lodged a bank guarantee and have secured Fidelity Insurance through the Queensland Law Foundation, a division of the Queensland Law Society to protect you in case of misappropriation of your funds by us.
(b) We also have professional indemnity insurance cover obtained through the Queensland Law Society in case of our being negligent as solicitors together with additional cover with QBE Insurance Ltd in respect of our being negligent in the establishment and monitoring of each loan.'
683 Ms Hume was asked:
'Q: And you understood that the risk you were contemplating taking was that MDRN might become liable for the negligent establishment of a loan, the evaluation or assessment of which had been performed by a non lawyer?'
A: Yes.'
684 In the course of her cross-examination, Ms Hume said that she understood that Brannelly was part-owned by MDRN. She was asked if she expected 'legal involvement' in respect of documents such as the loan agreement and said that she would have expected the partners to have been involved 'more so than just on the agreement side'. At TS 2292 the following questions and answers appear:
'Q: And you knew to that stage that is in '96, '97, '98 the solicitors themselves had never assessed or evaluated the loan applications. Correct?
A: No I can't confirm that's the case. They may have been involved. They - I mean, I would expect them to be involved in part of the process, if not from the assessment side.
Q: Well, from the information you saw on a review of the file, there was no reference to the solicitors being involved in the assessment or evaluation process, was there?
A: There was one of the documents I did believe had mention - no, I thought it was in the '97 file that in addition to the one that you showed me - that actually had reference to legal and banking experience.
Q: All right. But in relation to reference to legal and banking experience, you agreed with me earlier that there's a distinction between those commercial aspects of the loan assessment, and the transactional aspects. Correct?
A: Yes.'
Q: And you understood that people with the banking experience to look after the commercial. And legal experience to look after the transactional. Correct?
A: The information that was provided in addition to the loan, the document you showed me talked about the partners being involved in the approval process as well.'
685 Although Ms Hume asserted to the contrary, I am inclined to think that this evidence supports my view that the involvement of lawyers in the assessment process was not a matter of importance, and that Ms Hume did not, at the time, consider that it was.
686 A significant amount of time was taken in cross-examining Ms Hume concerning ex 80. This is a proposal and policy issued by QBE to another client company conducting a solicitor's mortgage business. The proposal was accepted by Ms Hume. QBE had not previously insured the relevant company. Ms Hume assessed the proposal at "3", which was rated as moderate/average, to be quoted only with caution. In the proposal it was asserted that the business had suffered no capital loss in six years. An "audit certificate" was enclosed. Counsel's intention in connection with this cross-examination seems to have been to demonstrate that Ms Hume was willing to accept the proposal, notwithstanding the fact that on at least one view, it was less attractive than that on behalf of MDRN. It seems that this proposal was the only other proposal in connection with a solicitor's mortgage business considered by Ms Hume at the relevant time.
687 QBE also called another employee, Stephen Robert Keith. He is the senior underwriter (financial institutions) within the professional liability division. He first became involved with MDRN in September 2003 when he considered a proposal for renewal of its cover. Mr Keith's superior had requested further financial documentation and résumés for external compliance committee members. In the proposal MDRN disclosed that in the 2001-2002 proposal it had notified QBE of certain claims. Mr Keith spoke to the QBE claims officer concerning the claims arising out of the Yandina project. It was not to be covered by the prospective 2003 policy. He also noted that the proposals for renewal in 2001 and in 2002 had been generally positive and not indicative of any apprehension that a formal claim would result, or that there would be any loss. He noted that in the 2001 renewal proposal MDRN had noted that a loss to investors was possible but had indicated that action would be commenced against the quantity surveyor and the valuer. Investors had been advised that they could still recover principal and some interest. Mr Keith therefore concluded that any claim would not be significant. He also understood from MDRN's prior disclosure that most run-out loans were likely to have been resolved by 31 October 2001. As a result of this he eventually accepted the proposal.
688 He considered a further proposal in October 2004. In the course of his assessment he discovered that in addition to the Rivett claim, proceedings had been initiated against MDRN in connection with two other loans and that there was notice of a third possible claim. The total of the three actual claims was in the order of $5.8 million. Mr Keith also learned that ASIC had been investigating the Rivett loan for some time, and that this had not previously been disclosed to QBE in connection with earlier renewals. Mr Keith considered that there were significant flaws in MDRN's loan assessment and approval process. In particular it had:
· promoted loans to investors without conducting appropriate "due diligence" in circumstances where even limited "due diligence" would have demonstrated the non-viability of the loan;
· in the case of the Rivett loan, not complied with the ten point plan which was actively promoted to investors;
· delegated the loan approval process to an employee, Mr Dale Blackadder, without any, or any adequate, partner supervision or other checks and balances;
· substituted investors in defaulting loans without properly informing the new investors of the repayment history;
· promoted refinance loans in circumstances when the borrower was in default with the existing lender; and
· failed to inform investors of (a) to (e).
689 These matters had not been disclosed in connection with the 2001 and 2002 renewal proposals. Mr Keith considered that they should have been disclosed. In the end cover for 2004/2005 was declined.
690 MDRN also called evidence on this issue. Mr Ryan said that from 1996 until 2004, he was primarily responsible for effecting MDRN's cover with QBE. In cross-examination Mr Ryan said that had he realized that in assessing the Yandina project, MDRN had not adhered strictly to the statements made in marketing brochures as to the process for approving such proposals, he would have drawn it to the attention of QBE in the 1999 proposal (TS 1984).
691 He spoke to Mr Blackadder on a daily basis. Their offices were adjoining. He had not fully examined the Rivett application until 'we were in the recovery process'. He said that heunderstood 'that Mr Blackadder would look at the assets of a borrower in light of what you would expect a borrower of that standing or age to have and he would make comparisons as to anything which might alert him to be suspicious. For example, if there is a lot of, for want of a better expression, art work or intangibles or something like that.' (TS 1990)
692 The following questions and answers appear at TS 2005-6:
'Q: Funds held in discretionary trusts, would that be a reason to be a bit worried?
A: Well funds held in discretionary trusts are - may well be typical in a particular borrower.
Q: So that wouldn't be a particular cause for concern requiring in your view anyway, Mr Blackadder necessarily to go any further than the usual course?'
A: It could. I mean, he's a - he's the banker and he'd be the appropriate person to answer that.'
693 He was asked at TS 1991-2:
'And because you understood that Mr Blackadder's purpose in looking at the assets and liability was only to determine whether the person had assets of a character or extent appropriate to that person's stage in life and position, you didn't expect him to be looking at them for the purpose of ensuring that the loan was going to be repaid?'
694 Mr Ryan replied:
'The statement of assets is not relevant to whether the loan is repaid because, in a project, you're looking at the proceeds providing the way the loan is going to be repaid.'
695 Mr Ryan was somewhat equivocal in his answers concerning this matter (at TS 1991 and 1992) but I understood the general thrust of his evidence to be that he did not expect Mr Blackadder to check a borrower's asset position other than in the general way outlined above. Further checking was unnecessary because, in Mr Ryan's view, it was appropriate to look to the project itself as the source of repayment rather than to the assets of the borrower. He said that the ten point plan set out in the autumn 1999 newsletter was based upon his understanding of what Mr Blackadder normally did in assessing a loan proposal, which information he checked with Mr Blackadder.
696 Concerning the letter to investors dated 23 October 2000 (ex 65), Mr Ryan was asked why he had not identified the possibility of proceedings against MDRN by investors. He said that he did not believe that they had been at fault. He considered that, for reasons which I have given, the quantity surveyor was primarily responsible for the failure.
697 In the course of his cross-examination Mr Ryan made it clear that he did not consider that loans were approved until such time as the funds were advanced. As I have previously indicated, this view is consistent with the letter concerning the proposed advance in this case (ex 1, tab 22). He was ultimately responsible for determining whether or not to make the advance.
698 Mr Ryan was cross-examined at some length concerning the statements of assets and liabilities provided by Mr Rivett for himself and for Project Results, particularly as to whether they constituted balance sheets. This seems to me to have been little more than a matter of terminology. I doubt that anything hangs on it. The more important question is the adequacy and accuracy of the information supplied and included in the investment summary. Mr Ryan also said in cross-examination that in the period from May to October 1999 he would generally read valuations submitted in support of loan applications. He did not do so in the case of the Yandina project. Mr Ryan agreed that he may have indicated, in the course of the ASIC inquiry, that he did not recall discussing the content of the autumn 1999 newsletter with Mr Blackadder. However I accept his evidence that he subsequently recalled such conversation.
699 In the course of cross-examination Mr Ryan also said that although he had not been involved in assessment of the Rivett application, he had, in connection with other transactions, interviewed the prospective borrowers and attended to other aspects of such transactions. He and Mr Blackadder had a "team" approach. However his major role was in connection with the preparation of legal documents, recovery work and loan management.
700 Perhaps unfortunately, counsel chose to cross-examine Mr Ryan in great detail concerning the process for assessment and approval of loan applications. Much of the cross-examination was, in my view, largely semantic. It is quite clear that the primary role, both in assessing each application, and in making the decision as to whether or not it was worth taking forward (to use a neutral term), was Mr Blackadder's. On the other hand Mr Ryan worked closely with him and would read any investment summary prior to its distribution to potential investors. He understood that the other partners also did so, but they clearly had a subordinate role in the process. No doubt it was relatively unusual for either Mr Ryan or any of the other partners to intervene once Mr Blackadder had decided that the proposal was worth pursuing. However, equally clearly, Mr Ryan and the other partners could, if they wished, intervene. There is nothing very unusual in such an arrangement. Once it is accepted that Mr Blackadder was well versed in lending, there was no reason why such an arrangement should not have been effective.
701 Messrs Durie, McCarthy and Neil all gave evidence. However Mr Ryan was primarily responsible for dealing with insurance matters concerning the mortgage business. Little of relevance appears from their evidence. Each appears to have been aware of ex 67 (the letter written by Mr Neil to the solicitors for the second respondent). Mr Neil said that he obtained the information contained in that letter from Mr Ryan. I will refer in more detail to the evidence of the other partners should it be necessary.
702 MDRN called Frank Leopold Gaston Hoffman, an insurance consultant. He conducted an insurance broking business from 1952 until the early 1970s. From that time until the early 1990s, he managed a broking company. He has been the national president of the Corporation of Insurance Brokers of Australia, president of the Insurance Institute of New South Wales, an honorary consultant to the Australian Law Reform Commission, a nominee of the Commonwealth Government to the claims panel of Insurance Enquiries and Complaints Ltd and national president of the Australian Insurance Law Association. In 1997, he was appointed by the Attorney-General of Victoria to make recommendations in relation to the Victorian Solicitors' Compulsory Professional Indemnity Scheme. He has lectured and written extensively on insurance-related matters, including good broking practice and the avoidance of professional indemnity claims. He has given technical and claims advice to insurers and brokers.
703 He said that in considering a proposal for indemnity insurance in connection with a mortgage business, the insurer might ask:
(a) What is the largest single mortgage anticipated for origination or lending?
(b) How many mortgages have been effected in the last twelve months?
(c) Are independent, qualified valuers invariably used? Does the mortgage broker check that their professional indemnity insurance is for sums greater than any valuation required of them?
(d) Are there levels of lending authority for various officers?
704 Mr Hoffman considered that in 1999-2000 the 'relatively onerous risks involved in mortgage generation and syndication' were well known to experienced professional indemnity underwriters and insurers. At that time insurers were 'less conservative in accepting risks than at other times, particularly since that time'. This was the most competitive time in the professional liability market. It was not long before the collapse of HIH, which company had introduced fierce premium competition into the market. As it was the largest insurer of general professional liability in the Australian market, that market was an 'insured's market' in terms of premium and terms. This evidence is of some importance in assessing Ms Hume's evidence.
705 Regarding Ms Hume's concern that Mr Blackadder was not a lawyer, Mr Hoffman pointed out that the risks covered by the policy were not those of a legal practitioner, but 'rather the commercial risks and consequences of this particular business which is mortgage lending and syndication of such mortgages to investors. The key skills in this business are commercial skills.' At the relevant time insurers did not require that lawyers be involved in approving loans, as opposed to preparing documentation and conducting searches. Mr Blackadder's background made him 'eminently more qualified than a lawyer to discharge loan assessment duties'. Mr Hoffman did not accept that a lawyer who is subject to review by his or her professional association is more reliable in promoting mortgages than a non-lawyer. A professional indemnity underwriter with an understanding of the processes involved in mortgage evaluation would not have been concerned by the fact that Mr Blackadder was not a lawyer. The underwriter would have regarded Mr Blackadder's appointment 'as a sound progression for a lending institution'.
706 As to Ms Hume's concern that Mr Blackadder was an employee and had no financial stake in the business, Mr Hoffman considered that this was not material to the risk accepted by QBE. He pointed out that many corporations, including government corporations, carry professional indemnity insurance, with not one person being a stakeholder in the relevant sense. In his view there is no criterion relevant to this form of insurance which would suggest that there is a greater risk where no stakeholder is involved as compared to the situation in which a person with a direct pecuniary interest is involved.
707 As to the extent of delegation to Mr Blackadder, Mr Hoffman said at pars 31 and 32 of his affidavit:
'31. In a commercial sense, an insurer would not expect a company, employing a general manager finance of sound experience and background, to have a partner or director sign off a transaction by de novo examining all the source documentation provided to the general manager finance, but rather could rely on a summary and recommendation by the general manager finance. Ms Hume notes that the investors were entitled to ask for source material …and it follows that the partners could do the same.
32. If the partners received only investment summaries and not source documentation, I do not consider that that was a fact material to the risk QBE was being asked to accept, provided the author was a person of appropriate background and experience. More particularly, this is borne out by the fact that it was not a matter that QBE considered germane to the risk by asking questions in the proposal and then later, on learning the appointment of a general manager finance, seeking no clarification as to the extent of his authority.'
708 As to the question of moral risk addressed by Ms Hume, Mr Hoffman said at 34:
'In any event, "moral risk" is a term in the insurance industry which goes to something in the character of an insured which might lead to the insured deliberately bringing about losses to make a claim or falsifying his claim, say to arson, untrue statements in the making of a claim or making a fraudulent claim. It is not a matter of ethics or integrity per se, or something which an insurer would normally consider in relation to sales material. In my experience, insurers reading such sales material would anticipate a level of "puff" which they would not consider to be relevant to moral risk.'
709 As to non-compliance with the ten point plan, Mr Hoffman understood that the autumn 1999 and winter 1999 newsletters were not part of the proposal, and that compliance or otherwise therewith played no part in Ms Hume's decision to accept the risk. He also did not consider that the existence of those documents was itself a matter requiring disclosure, particularly as QBE 'did not ask any questions about the actual workings of the lending business and it was sales type material' (par 35). Mr Hoffman considered that had it been disclosed that Mr Blackadder had not complied with the ten point plan in relation to the Rivett loan assessment, an insurer would not have declined cover but would have increased the premium and required to be satisfied that steps had been taken to prevent future similar occurrences. In cross-examination Mr Hoffman said that promotional material distributed by MDRN was not a reliable or relevant basis for assessing risk. He considered that it would be a poor underwriter who acted on such information. I take this to mean that Mr Hoffman would not assess the risk upon the assumption that such material was accurate. However I did not understand him to mean that an underwriter would treat as irrelevant the fact that the practice followed by the insured diverged from the procedures identified in that material. He dealt with that matter at a later stage.
710 He said that insurers may have been less conservative in accepting risks in 1999. They were 'not terribly fussy about how they accepted a risk … .' He agreed that an underwriter might react to competition in the marketplace by reducing premiums rather than by accepting increased risk, but both approaches were available. He said that it was not a matter of accepting greater risks, but rather of accepting risks that were not fully understood.
711 It was suggested to Mr Hoffman that lawyers might have expertise in checking the accuracy of information against sources. I have some difficulty in accepting that as being a skill typical of lawyers. No doubt it is a desirable legal skill. Mr Hoffman also said that he would expect 'some auditing' of the performance of a person in Mr Blackadder's position. In my view it is at least feasible that such "auditing" might have been provided by the close day-to-day relationship that Mr Ryan had with Mr Blackadder. Mr Hoffman said that absence of such auditing would be material to the risk. However, as far as I am aware, there is no evidence that such a system of auditing was an established feature of the mortgage finance industry at the relevant time. I am therefore unable to see that there was any relevant non-disclosure. Mr Hoffman did not consider it relevant to moral risk that a partner might be aware that assessment of loans was not done in accordance with a notified practice such as the ten point plan. However he considered it relevant to actual risk. It would be a matter of great concern and a reason for not granting cover. He agreed that misrepresentation or negligence in respect of a previous loan would be a relevant matter for disclosure, together with information as to steps taken to remedy the defect and to avoid repetition.
712 MDRN also called evidence from Mr Scott Willmot, who is the national manager of professional and consumer services at AON Risk Services Australia Ltd, the insurance broker in connection with MDRN's insurance. He submitted the 1996 proposal which was accepted. The policy was also renewed in 1997, 1998 and 1999. In the proposal for renewal of the policy for the year 2000-2001 MDRN notified QBE of circumstances which might give rise to a claim, namely the circumstances associated with the Yandina project and a number of other loans. This is the document attached to the proposal to which I have previously referred. QBE renewed the insurance for the 2000-2001 year. In 2001 MDRN gave notice of circumstances relevant to renewal for the 2001-2002 year, attaching the letter from Mr Wade Mellish to which I have previously referred. The policy was renewed for 2001-2002 and, in 2002, for 2002-2003. In August 2003 MDRN notified QBE that the present proceedings had been commenced. The policy was renewed for the 2003-2004 year. Mr Willmot was not subsequently involved in dealings between MDRN and QBE.
713 Mr Willmot's place was taken by Andrew MacKenzie who has also sworn an affidavit. He submitted a proposal for renewal on 17 October 2004 and was advised on 28 October that the proposal had been declined upon the basis that it fell outside underwriting guidelines.
714 Although the second cross-respondent's pleading raises a most complex network of facts and circumstances said to comprise either material non-disclosure or misrepresentation, and although their written submissions to some extent reflected that complex web, the case eventually put in oral submissions was much simpler. Senior counsel said, at TS 2525:
'On the 1999 policy the first defence we raise is the non-disclosure-misrepresentation defence. It really covers the same ground.
The non-disclosure covers three topics. They are, firstly, the non-disclosure of MDRN's practice as to how it went about checking or, you could say "non-checking", the assets and liabilities of borrowers. The second is the non-disclosure of the actual misrepresentation made in the Rivett investment summary. The third is what might be described as the lack of supervision or lawyer involvement. Unfortunately, the evidence has tended to focus on the third. I won't be saying any more about it in oral submissions, because the first two are really simpler and, we say, a very straight forward way to get there.'
715 As QBE has proceeded upon the basis of non-disclosure, it is not necessary to consider any case based on misrepresentation.
716 To rely upon non-disclosure, QBE must establish non-disclosure of a matter:
· known to the insured; and
· which is known by the insured to be relevant to the insurer's decision, or which a reasonable person, in the circumstances, could be expected to know to be so relevant.
717 For present purposes, QBE must also establish that had the matter been disclosed, it would not have accepted the proposal for the 1999-2000 year. It is convenient first to consider this matter. It is primarily addressed in the evidence of Ms Hume and Mr Hoffman.
718 I have a clear preference for the evidence of Mr Hoffman over that of Ms Hume. This preference is based upon three considerations. Firstly, Mr Hofmann has substantially more experience than Ms Hume had at the relevant time and has now. Secondly, her evidence had the ring of ex post facto justification about it. In particular, her view that legal skills were relevant to the assessment of a loan proposal seemed to me to border on the irrational. Her evidence concerning supervision of Mr Blackadder was also somewhat unrealistic. I much preferred Mr Hoffman's approach. Thirdly, Mr Hoffman is clearly independent. Ms Hume does not enjoy that luxury. I do not mean to imply that Ms Hume's evidence was of no use or was in any sense dishonest, but her own involvement in the transaction cannot be overlooked. I suspect that it has affected her objectivity.
719 I reject Ms Hume's evidence concerning the significance to her of legal involvement in approving loan proposals. That function did not call for legal qualifications. Ms Hume seems not to have been concerned by the fact that in earlier years, assessment was conducted externally by a company which was not apparently providing legal services. Whoever accepted those proposals apparently saw no difficulty in doing so. As to supervision of Mr Blackadder, there is no evidence that it was an established practice in the mortgage investment industry to audit the files of senior employees such as Mr Blackadder to ensure compliance with prescribed procedures. I have some difficulty in seeing how, in those circumstances, QBE could have expected that such a system was in place. If there was no such reasonably based expectation, then I cannot see that there was any failure to disclose the absence of such a system. In other words there is no basis for inferring that MDRN knew that the matter was relevant to QBE's decision or that a reasonable person, in the circumstances, could be taken to know that such matter was relevant. The absence of an audit system could only be known to be relevant if it were known that QBE believed that there was such a system. It is true that Mr Hoffman also expected some system of that kind. However, in the absence of evidence that it was usual in the finance industry or any part of it, that insurers might think such a practice to be desirable does not entitle them to assume that it occurs, nor does it mean that a potential insured must be aware of such belief.
720 In my view the only matters of concern which arguably should have been disclosed in the 1999 proposal, if MDRN was relevantly aware of them, were:
· the misstatement in the investment summary concerning the asset positions of Mr Rivett and Project Results;
· the misstatement in the investment summary concerning the pre-sale of units; and
· if it be the case, any divergence between statements in the newsletters as to mortgage assessment practice and actual practice.
721 I am satisfied that a reasonable person, in the circumstances, could have been expected to know that such matters would be relevant to QBE's decision.
722 The question, then, is whether any of the three matters mentioned above was known to MDRN, and if so, whether it knew that any such matter was relevant to QBE's decision to accept the proposal, or whether a reasonable person, in the circumstances, could have been expected to know that such matter was relevant. It is appropriate to consider the meaning of each of the words "known", "knows" and "know" in s 21. Two questions arise for consideration. The first is whether the required knowledge must be actual, or whether it is sufficient that it can be inferred from other matters known to the insured. The second is the extent to which the knowledge of some person other than the insured is to be imputed to him or her. The Insurance Contracts Act seems not to deal with either question other than in the bald terms of s 21. However the cases establish, with respect to the first question, that it is actual knowledge which must be disclosed. Thus in Permanent Trustee Australia & Anor v FAI General Insurance Co Ltd (1998) 44 NSWLR 186 at 247, Hodgson CJ in Equity (as his Honour then was) said:
'In my opinion, "known" in s 21(1) means more than "suspected" or "believed". What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term "known". However, it must be remembered that a belief may sometimes itself be a matter relevant to the decision of an insurer. An insured may know that it has a particular belief, and know that its having that belief is relevant to the decision of an insurer, in which case that belief itself is a matter which must be disclosed.'
723 On appeal (at (2001) 50 NSWLR 679) Handley JA said at [45] et seq (Meagher and Powell JJA concurring):
'45. The problem of defining, for legal purposes, the boundary between belief and knowledge did not arise for the first time in this case. The problem has been considered in a number of legal contexts, and in general it may be said that, for legal purposes, our knowledge includes the facts, apart from matters of religious faith, that we believe to be true.
46. Thus out of court admissions are receivable in evidence against a party if they disclose an intention to affirm or acknowledge the existence of a fact whatever the party's source of information or belief; see Lustre Hosiery Ltd v York (1935) 54 CLR 134 at 143. However, as the Court said (at 144):
"If it appears that [the party] had no knowledge, or that, although he had some means of knowledge, he had formed no certain or considered belief and indicated nothing amounting to a personal judgment or conclusion of his own, the probative force of the admission may be so small that a jury ought not to be allowed to act upon it alone, or in preference to opposing evidence."
…
54. … When a person, on the basis of some information, holds a belief on which that person is prepared to act in the world of practical affairs, he or she knows that fact for most legal purposes, and certainly for the purposes of s 21.'
724 In Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd [1999] 1 Qd R 279, the Court of Appeal of Queensland addressed the question of whether a person who was aware of certain facts should be taken to have knowledge of a reasonably available inference from those facts. Of that proposition Pincus JA said at 283-4 (Moynihan SPJ and Byrne J concurring):
'Acceptance of that argument must depend on adoption of a construction of section 21(1) which is rather generous to insurers: that the section means that if an insured knows matter A which is not in itself relevant to insurance, but the insured should reasonably infer from matter A a further matter B which is so relevant, then the duty to disclose matters A and B arises. This construction is in practical terms little different from reading the introductory part of section 21(1) as if it included the expression "… every matter that is known to or should be inferred by the insured".
I have found no authority which supports such a reading, nor does it appear to be one which must be adopted to give section 21(1) a sensible operation.'
725 As to imputed knowledge, in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813, Young J said at 74,998:
'Although the language of section 21 is awkward, in my view it means that if a reasonable person in the circumstances could be expected to know that a matter is relevant it must be disclosed and whether that be the case or not, if the insured actually knows the relevant thing, that is enough. However, the insured must have actual knowledge of the thing, the mere fact that he ought in the ordinary course of business to have known is insufficient.'
726 Nonetheless, in some cases, knowledge of an agent will be imputed to the principal. In Peter MacDonald Eggers, Simon Picken and Patrick Foss, Good Faith and Insurance Contracts (2nd ed), Insurance Law Library, London, 2004, the authors assert at par 13.49:
'The agents whose knowledge principally is imputed to the assured are those agents who are concerned with the custody, care or status of the subject matter insured, general agents who are so placed with respect to the assured that they may be said to make decisions for the assured generally and agents who are charged with arranging the insurance.'
727 The authors of MacGillivray on Insurance Law (10th ed) say at par 1812:
'It is not all agents whose knowledge is imputed in that way for purposes of non-disclosure but only those agents who are "agents to know" that is to say, are responsible for keeping the assured informed about the subject matter of the insurance, either because they are responsible for placing the insurance or because they have the management of it for the assured. If such an agent owes a duty to communicate information which is relevant to the insurance, but fails to do so, the assured is deemed to know what in the ordinary routine of his business he should have been told if the agent had performed his duty, but he will not be deemed to know facts which, whether or not owing to the deficient organization of the business, no agent was responsible for communicating to him.'
See also Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 and Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 5 ANZ Ins Cas 60-933.
728 McNair J discussed the matter at length in Australia and New Zealand Bank Limited v Colonial and Eagles Wharves Limited (1960) 2 Lloyd's Rep. 241. In that case his Lordship assumed that at common law, rules derived from the Marine Insurance Act 1906 (Imp) applied to non-marine insurance. After reference to the authorities, his Lordship observed at 254:
'These judgments make it clear to my mind that it is not the knowledge of all agents or servants that is imputed to the proposer of any marine insurance, but only the knowledge of quite a limited class, namely, the broker who actually places the insurance, the master or the ship agent, or, to use Lord Halsbury's phrase, "his general agent for the management of his shipping business." On the facts of the present case, Henderson was not within that limited class. Though, in a sense, the key man in the sense that a mistake by him would mean the failure of the system his duties were almost entirely clerical; it was not established that he had any discretion or executive authority; he was not superior to the head clerks in the warehouses but co-ordinate with them. He was not, in my judgment, a person within the class of those who were under a duty to report to the company.'
See also Sutton's Insurance Law in Australia (3rd ed) at pars 3.183 and 3.184, and Tarr's Australian Insurance Law at 104-105. It seems to be generally accepted that the position under the Insurance Contracts Act reflects the common law position.
729 Mr Ryan was responsible for MDRN's mortgage business. Mr Blackadder was employed as the General Manager (Finance) or "Lending Manager". His duties as set out in his letter of appointment (ex 44) were
'1. To source loans directly and through finance brokers and to then assess them for submission to our Private Mortgage System;
2. Assessment shall include analysis of pertinent financial data provided by each borrower and checking of same, organizing external valuations and on-site visits, checking of CRAA details, liaising and organising QS reports and preparation of loan summaries for investors to peruse;
3. On construction and development loans to visit the site regularly and check QS reports and updated valuations where necessary;
4. To liaise with investors concerning queries they may have about any loan proposal submitted;
5. To liaise and negotiate with borrowers, brokers, valuers and real estate agents concerning any default by the borrower in payment of interest or principal;
6. To assist our Property Syndication Department in finding suitable investment properties and to perform due diligence in respect of same and to negotiate lending terms with financial institutions.'
730 MDRN has been at pains to point out that Mr Blackadder was a senior employee, receiving a high salary relative to other employees, including employed solicitors. Clearly, he was expected to assume substantial responsibility in connection with the assessment of loan proposals. According to ex 44 his contact with potential investors was limited to liaison 'concerning queries'. However his duties also included the preparation of investment summaries for distribution to potential investors. His responsibility for assessing loan proposals and drafting investment summaries placed him at the centre of the mortgage business. I infer that he had an implied duty to report to the partners as to strengths and weaknesses of each proposal and as to the content of any investment summary. The applicants and the cross-respondents assert the absence of any system of accountability or supervision. However I reject that assertion. Mr Ryan had daily contact with Mr Blackadder. He read investment summaries before they were distributed. The other partners also saw copies, although at a later stage. I infer that Mr Blackadder also had an implied duty to report to the partners concerning any serious irregularity in his area of responsibility, including any matter which might lead to litigation against MDRN or the trustee company. His knowledge of such matters should be imputed to each of them, subject only to one qualification which is discussed below. As to the relationship between Mr Ryan and the other partners, Mr Ryan supervised the mortgage business and was responsible for negotiating the cover for it. In those circumstances it follows that the other partners had imputed knowledge of relevant matters known to Mr Ryan, again subject to one qualification.
731 The general principles to which I have referred are subject to a critical qualification. In ANZ Bank v Colonial Wharves (supra) McNair J said at 254:
'There is, however, another answer in law to the third party's contention on this point, namely, that assuming that he was within the class of persons who were under a duty to report so that his knowledge was to be imputed to his principal, he, on the principle stated in Bell & Anor v Lever Bros Ltd & Ors [1932] A.C. 161, and J C Houghton & Co v Nothard, Lowe & Wills Ltd [1928] A.C. 1 … was under no duty to report his own dereliction of duty, and his knowledge of that dereliction is not to be imputed to his principals.' Lord Atkin ([1932] A.C. 6, at p 228) puts the matter succinctly in the following passage:
"… The servant owes a duty not to steal, but, having stolen, is there super-added a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well established usage of mankind and would be to create obligations entirely outside the contemplation of the parties concerned …".'
732 Sutton observes, concerning that decision, at 339:
'What had to be considered was what an honest and competent agent would have communicated to the assured in the ordinary course of business, and such an agent would not have had any dishonesty to reveal.'
733 Similarly, MacGillivray observes at 18-16:
'An agent's knowledge of his own fraud or misconduct and matters relevant to it will not be imputed to the assured … because it cannot be supposed that in the ordinary course of business an agent will disclose his own fraud, misconduct or serious breach of duty to his principal. Thus another reason for the decision in Australia and New Zealand Bank v Colonial and Eagle Wharves that the knowledge of the assured's chief entry clerk concerning the company's delivery systems was not to be imputed to the assured was that it would have revealed his own misconduct and he had no duty to report that to his superiors.'
734 As the duty to disclose extends only to matters which the insured knows, only matters actually known to a relevant agent will be imputed to him or her. In Commercial Union Assurance Co of Australia Ltd v Beard (2000) 11 ANZ Ins Cas 61-458, Davies AJA (Meagher JA and Foster AJA concurring) said at 75-259:
'The terms "known" and "knows" are used in their common law sense. Their primary denotation refers to that which is actually known; but it would be wrong to import the word "actually" into a provision such as section 21. The section does not use it. The terms "known" and "knows" are used in their ordinary sense. Whether a matter is known is a question of fact for the judge or jury.'
735 In Hammer Waste Pty Ltd v QBE Mutual Ltd [2002] NSWSC 1006, Palmer J referred to that decision and said:
'… (I)n s 21(1) … the word "know" is used in its ordinary sense; it implies actual, not constructive, knowledge both on the part of the insured and on the part of any agent or employee of the insured whose "knowledge" is to be imputed to the insured. The obligation to disclose something "known" can attach only to something which, at the time for disclosure, a person actually has in his or her consciousness or else something which exists in some record or other source of information which the person actually knows about and to which the person has access. So, for example, I "know" my driving licence number for the purposes of s 21(1) … even though I cannot recite it off hand because I actually know that it is to be found in the plastic card in my wallet.'
736 I return to the three matters which may have required disclosure. I am satisfied that a reasonable person, in the circumstances, could be expected to know that each of those matters would be relevant to QBE's decision. I have indicated with respect to the third of those matters, divergence between contents of the newsletters and actual practice, that I am not satisfied that there was any significant divergence. However, for reasons which appear below, it is not necessary finally to decide that question.
737 QBE asserts that Mr Ryan was familiar with the content of the investment summary and knew that Mr Blackadder did not carry out detailed checks of the asset positions of applicants for loans as allegedly asserted in the newsletters, or credit checks against guarantors as asserted in the winter 1999 newsletter. It is said to follow that he had knowledge which should have been disclosed. In my view unless asked, Mr Ryan had no duty to disclose either the content of the newsletters or the actual practice which was adopted. At least for present purposes, neither matter, by itself, exposed either MDRN or QBE to risk. The relevant matter was the alleged divergence between the two. As I have said, I do not necessarily accept that there was a significant divergence. It is at least arguable that the practice as described by Mr Blackadder and Mr Ryan was a form of checking in the sense in which the term was used in the newsletters. Potential investors may have understood the newsletters to imply something more, but for present purposes we are looking at the subjective states of mind of Mr Blackadder and Mr Ryan.
738 Once it is accepted that the language of the newsletters is not as precise in meaning as is submitted by QBE (and the applicants), and that Mr Blackadder's practice varied, depending upon the exigencies of a particular application, it becomes very difficult to identify the point at which divergence between statement and practice may have occurred. If the fact in issue were whether or not there was such a divergence, it would be necessary to determine that question. However, for present purposes, it is only necessary to determine whether or not either Mr Ryan or Mr Blackadder knew that there was a divergence. Whilst I have no doubt that Mr Blackadder was conscious of his own fraud, I am not satisfied that the practice which he otherwise followed, or claimed to have followed, was, to his knowledge, inconsistent with the statements in the newsletters. It is probable that in providing information for the autumn 1999 newsletter, he used the expression "checking" (or whatever expression he used to convey that idea) to describe the approach which he described in evidence. Nothing in his evidence suggested to me that he was aware at the time of any divergence between those statements and the practice which he actually followed. Whilst it may be arguable that the interpretation placed by QBE (and the applicants) upon the newsletters, particularly the autumn 1999 newsletter, is correct, it does not follow that Mr Blackadder held that view. It also does not follow that he was aware of any divergence between such statements and his practice. I am similarly not satisfied that Mr Ryan was aware of any such divergence. In explaining this view I should say something about certain assumptions which appear to underlie much of the applicants' case and also those of both cross-respondents.
739 From time to time in this case, it has been suggested or assumed that the respondents were simply unconcerned about the investors' interests, that they were concerned only to make a profit for themselves. No doubt such a short-term view often guides the actions of those who attract the attention of ASIC. However it is quite unlikely that these respondents had that attitude. MDRN is a firm of solicitors practising in the suburbs of Brisbane. They have done so for some years and, as far as can be seen, propose to continue doing so. No doubt the firm's reputation is an important asset. The mortgage business was primarily marketed to clients of the legal practice. The evidence discloses that numerous investors participated in loans on more than one occasion, reflecting a degree of satisfaction with their previous investments. It is most unlikely that the MDRN partners intended to throw away both their professional reputation and their mortgage business for short-term gains derived from careless assessment of proposed loans. It cannot be seriously suggested that they expected Mr Blackadder to do anything other than ensure that investments would be secure, and that investors would continue to be clients of both the legal practice and the mortgage business.
740 I am not saying that lawyers are presumptively incapable of fraud or recklessness. I am rather saying that it is unlikely that the MDRN partners would have seen it as being in their interests to take a quick profit at the expense of their clients and investors. Mr Ryan's evidence must be understood in that context. No doubt he expected Mr Blackadder to assess loan applications in a way which would minimize the risk of loss to investors who were, almost by definition, making speculative loans. Mr Ryan understood the ten point plan to be an explanation of Mr Blackadder's general approach. I see no reason to conclude that he was conscious of any departure from his understanding of it or other aspects of the newsletters. It follows that I am not satisfied that he was aware that the statements concerning the asset positions of Mr Rivett and Project Results had not been checked (as he understood the practice) or that he was aware of the inaccuracies in the investment summary concerning those matters and the pre-sale of units. He was certainly not aware of Mr Blackadder's fraud. I therefore conclude that Mr Ryan possessed no knowledge which he failed to communicate to QBE. It follows that no such knowledge can be imputed to the other partners.
741 As to Mr Blackadder's knowledge, for reasons which I have given, I am also not satisfied that, save for his fraud, he was aware of any divergence between statements in the newsletters and his practice. As to his fraud, his knowledge of it cannot be imputed to the MDRN partners. I consider that his negligence in connection with the statements about the pre-sale of units was sufficiently serious to be described as serious misconduct. As I have said, it was obviously an important topic in the loan application, the investment summary and for the purposes of the valuation. Knowledge of that matter is also not to be imputed to the MDRN partners.
742 It follows that there was no failure to disclose or misrepresentation for the purposes of s 28 of the Insurance Contracts Act.