Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd

The registration of the crane was "a material variation", as Giles J. found in the Supreme Court of New South Wales. Ferrcom was bound to notify the fact of registration to Commercial Union if it were to satisfy the condition contained in cl. 1(a) which read:

The extent of the liability of the Company is conditional upon -

(a) The notification as soon as possible by the Insured to the Company of any change materially varying any of the facts or circumstances existing at the commencement of this Policy.

In early May 1987, Mr. Ferrarese, the managing director of Ferrcom, told Mr. Green, who controlled Inbush (N.S.W.) Pty Ltd ("Inbush"), Ferrcom's broker, that the mobile crane was going to be registered and asked Mr. Green to fix up the insurance. Unfortunately, Mr. Green failed to notify Commercial Union that the mobile crane either was to be or had been registered.

On 16 September 1987, when the crane was working on the Darling Harbour site in Sydney, it overturned whilst lifting some large steel structures from a rail truck. It was damaged and Ferrcom claimed under the policy for the loss it had suffered. Commercial Union denied liability. In the ensuing action, Ferrcom's claim against Commercial Union was allowed by Giles J. but the claim was dismissed on appeal to the Court of Appeal by majority (Kirby P. and Handley J.A., Priestley J.A. dissenting) [1] . On appeal to this Court, it was common ground that Ferrcom had not satisfied the requirements of cl. 1(a) of the policy and that Commercial Union would have been entitled to refuse to pay the claim unless the Insurance Contracts Act 1984 Cth ("the Act") prescribes a different result. Division 3 of Pt V of the Act contains the following provisions:

(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the 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 by reason only of that act but his liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests 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 contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

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

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

(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 by reason only of the act.

(6) A reference in this section to an act includes a reference to -

(b) an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.

15. The provisions of this Division with respect to an act or omission are exclusive of any right that the insurer has otherwise than under this Act in respect of the act or omission.

Ferrcom relies upon these provisions as excluding Commercial Union's right to avoid the policy or to deny liability under the policy as a result of Ferrcom's non-compliance with the condition contained in cl. 1(a) of the policy. It submits that Commercial Union's liability to meet its claim under the policy is reduced only by an amount which, in the discretionary judgment of the court, "fairly represents" the prejudice which Commercial Union suffered by being exposed to an increased risk of damage when the mobile crane was travelling on a public road. That increased risk, so the argument runs, was the prejudice suffered "as a result of" Ferrcom's failure to notify the registration. Commercial Union, on the other hand, submits that the extent to which its "interests were prejudiced" by non-notification is to be measured by reference to the position it would have been in if Ferrcom had notified it of the registration of the mobile crane. Had Ferrcom given that notification, Commercial Union contends that it would have cancelled the policy in respect of the mobile crane. Clause 3(a)(2) of the General Conditions of the policy provided for cancellation by the insurer:

Subject to the provisions of the Insurance Contracts Act 1984 the Company may cancel this Policy at any time by giving 30 days notice in writing to the Insured of the date from which cancellation is to take effect. Such notification is to be delivered personally or posted by certified mail to the Insured at the address last notified to the Company. Proof of mailing will be sufficient proof of notification. The litigation has apparently been conducted on the conventional basis (i) that Commercial Union would have been entitled under cl. 3(a)(2) to cancel the policy in respect of the mobile crane if it had been advised that the crane had been registered and (ii) that Commercial Union's entitlement in that regard would have been unaffected by s. 63 of the Act [2] . In accordance with that conventional basis, the policy should be construed as though an effective right to cancel was conferred by cl. 3(a)(2). 1. Section 63 prohibits an insurer from cancelling a contract of general insurance except as provided by the Act and denies effect to a purported cancellation in contravention of s. 63. Presumably it is accepted that some other provision of the Act (perhaps ss. 59 and 60(2)(b)) would have permitted Commercial Union to exercise the right to cancel.

Accordingly, Commercial Union must be taken to have been at liberty to exercise the right to cancel the policy in respect of the mobile crane had it known of the registration. Giles J. found that, if Commercial Union had been notified of the registration of the mobile crane it would have gone off risk, presumably by cancelling the policy under cl. 3(a)(2) after giving thirty days notice of its intention to do so. Had Commercial Union cancelled the policy, his Honour thought that Ferrcom would have applied for alternative cover and that Commercial Union would have been willing to provide alternative cover under a commercial motor vehicle policy subject to an endorsement known as ME35A. The ME35A endorsement in use by Commercial Union read as follows:

The Company shall not be liable under Section 1 of this Policy for loss or damage in respect of those vehicle(s) specified in the Schedule of this Policy resulting from overturning -

(i) arising out of the operation of such vehicle(s) as a crane or

(ii) of plant forming part of or attached to such vehicle(s) except for loss or damage caused by Fire, Theft or impact of another vehicle.

The other terms, exclusions and conditions of this Policy remain unchanged. If Ferrcom had accepted such a policy and had paid the additional premium, nevertheless the endorsement would have excluded liability for the loss that occurred when the crane overturned. Mr. Hughes, a Senior Motor Underwriter for Commercial Union, gave evidence that he had never waived the ME35A endorsement in a policy to cover a registered mobile crane and he added: In determining whether or not to insist upon the endorsement, I would have taken into account the amount of insurance which Commercial Union had for the particular insured, their past years claims experience and most important the support and amount of insurance business placed with Commercial Union by the particular broker. The standing of Mr. Green of Inbush with Commercial Union was such that, as Handley J.A. found, "[the] Court can safely conclude that after 11 May, Mr. Green would not have secured cover from the appellant for this crane without the endorsement" [3] . However, as Mr. Green was leaving the industry, Ferrcom progressively engaged the services of Hemms Cassell & Associates Pty Ltd from 4 July 1987, and that broker's standing with Commercial Union was such that Mr. Hughes would "reluctantly have agreed" to waive the endorsement had the waiver been sought by Hemms Cassell. If the endorsement had been waived, an additional premium of $8757.13 would have been payable and the excess would have been increased by $800. Giles J. found that "the prejudice to [Commercial Union's] interests as a result of the failure of Ferrcom to notify the registration of the crane was not that it remained on risk in relation to damage to the crane from overturning, but that it remained on risk without having received the additional premium or imposed the increased excess of which Mr. Hughes spoke. That is the real extent of its damage and the real measure of its damages." In the Court of Appeal, however, that view was rejected. The hypothesis adopted by Kirby P. and Handley J.A. was that Mr. Green would have continued to act for Ferrcom in the obtaining of insurance for the crane and that Commercial Union would not have granted cover except on the terms of the ME35A endorsement. That hypothesis was strengthened by the fact that, in July 1988, Hemms Cassell sought renewal of comprehensive insurance of two registered mobile cranes from Commercial Union for Ferrcom without requesting the waiver of the endorsement. Renewal was granted subject to the endorsement. Their Honours assessed the prejudice to Commercial Union resulting from Ferrcom's failure to notify the registration of the mobile crane by adopting the hypothesis that Commercial Union would have cancelled the policy and would not have accepted any further risk of damage to the crane by overturning. The evidence of Mr. Hughes, accepted by Kirby P. and Handley J.A., demonstrated that no other hypothesis was reasonable. It is by reference to that hypothesis that the court has to determine the amount "that fairly represents the extent to which [Commercial Union's] interests were prejudiced as a result of" Ferrcom's failure to notify the registration of the mobile crane. 1. (1991) 22 N.S.W.L.R., at p. 417.

The construction of s. 54 is not without difficulty. It prescribes the effect to be attributed to an "act", a term which par. (a) of sub-s. (6) extends to include an "omission". Curiously, par. (b) which is in form a further extension of the term "act" includes only acts and omissions of a limited class [4] . However, we need not be troubled by the drafting of sub-s. (6). It is sufficient to note that an act or omission on the part of the insured can attract the operation of s. 54. Section 54 prescribes the effect to be attributed to two classes of "act": an act that "could reasonably be regarded as being capable of causing or contributing to [the] loss" and an act that could not reasonably be so regarded. Sub-section (1) relates to acts or omissions occurring after the contract of insurance is entered into that could not reasonably be regarded as being capable of causing or contributing to the loss; sub-ss. (2)-(4) relate to acts or omissions that could reasonably be regarded as being capable of causing or contributing to the loss.

The dichotomy between the two classes of acts or omissions is not entirely clear. It seems that the effect of an act that has not caused a loss or part of a loss depends on whether the act "could reasonably be regarded as being capable of causing or contributing to [the] loss". Whatever difficulties there may be in cases where such an act does not cause the loss or part of the loss, it was common ground that the act or omission by Ferrcom in failing to notify the registration of the mobile crane could not "reasonably be regarded as being capable of causing or contributing to [the] loss" and is therefore an "act" falling within sub-s. (1) of s. 54. The failure to notify would, but for s. 54, have entitled Commercial Union to refuse to pay the claim, not because Commercial Union might have cancelled the policy - it did not do so - but because its liability under the policy was conditioned upon Ferrcom's compliance with cl. 1(a). The effect of s. 54(1) is to impose on Commercial Union a prima facie liability to pay Ferrcom's claim, but it does not purport to annihilate the effect of the relevant "act" in determining "the extent to which the insurer's interests were prejudiced". As liability imposed by s. 54(1) is a liability which, but for the relevant "act", would have arisen under the contract of insurance, the insurer in s. 54(1) must be taken to be the actual insurer and "the insurer's interests" must be taken to be the interests which it would have had but for the relevant "act", leaving out of account the liability imposed by s. 54(1).

The Act was introduced following a Report by the Australian Law Reform Commission [5] which gives some indication of the effect which s. 54 was intended to attribute to acts and omissions which do not cause or contribute to a loss. The Report contains the following [6] :

Where the insured's conduct could not, in principle, have caused or contributed to the loss, the insurer should also be limited to a right to damages. Those damages should be assessed by reference to ordinary contractual principles. That would, presumably, involve an application of the principle of proportionality. The Commission recognises that, in some cases, that principle might be difficult to apply. But it believes those difficulties are justified by the need to strike a fair balance between insurer and insured in the relatively few cases to which the principle would apply. The actual test should be stated in terms of prejudice to the insurer. Damages should be measured by reference to the prejudice the insurer has suffered as a consequence of the insured's conduct. 1. Insurance Contracts (1982), No. 20. 2. par. 228.

The "ordinary contractual principles" as to damages are indeed difficult to apply when the relevant act or omission is not a breach of contract but merely a failure to satisfy a condition precedent to the insurer's liability. But to give the latter part of s. 54(1) some operation in a case where the relevant act is merely a failure to satisfy a condition precedent to the insurer's liability, it is necessary to treat a condition precedent as a term imposing on the insured an obligation to comply with it and to treat a failure to satisfy the condition precedent as a breach of a term obliging compliance. By doing so, "the extent to which the insurer's interests [have been] prejudiced as a result of [the] act" can be assessed. If a condition precedent is taken to impose on the insured an obligation to comply with it, ordinary contractual principles require that the position which the insurer would have been in if the insured had performed the obligation is to be compared with the position that the insurer is in as a result of the insured having failed to perform the obligation [7] . In determining the position that the insurer would have been in, it is necessary to adopt an hypothesis as to what Commercial Union would have done if it had been notified in May 1987 that the mobile crane was to be or had been registered.

1. The Commonwealth v Amann Aviation Pty Ltd (1991), 174 C.L.R. 64, at pp. 80, 98-100, 116, 117, 134, 148, 161.

The Report's suggestion that ordinary contractual principles "would, presumably, involve the application of the principle of proportionality" is truly daunting, especially when the acts to which s. 54(1) relates are not acts which "could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract". The Report's discussion of proportionality [8] throws no light on what s. 54(1) was intended to achieve for the proportionality discussed in earlier paragraphs of the Report related to an insurer's responsibility for "its proportion of the total risk" [9] . It is unnecessary to consider whether such a concept can be usefully employed in cases of misrepresentation and non-disclosure affecting the formation of a contract of insurance but it cannot be employed as an ordinary contractual principle in assessing the prejudice actually caused to an insurer's interests by an act done or omission made by an insured. Ex hypothesi, an act or omission falling within s. 54(1) may result in prejudice to the insurer though it does not cause loss to the insured. The prejudice will consist in the existence of a liability which, in whole or in part, would not have been borne by the insurer if the act had not been done or the omission had not been made or in the non-receipt of an additional premium to which the insurer would have been entitled by reason of the doing of the act or the making of the omission.

The prejudice to the interests of Commercial Union resulting from Ferrcom's failure to notify Commercial Union of the registration of the mobile crane does not consist merely in the increased risk attendant on the driving of the mobile crane on public roads nor in the non-receipt of the additional premium which Commercial Union would have demanded if it had continued to insure Ferrcom against damage to the mobile crane caused by overturning. Those disadvantages were but part of the prejudice. The loss of the opportunity to cancel the policy was the material prejudice suffered by Commercial Union. Indeed, the additional premium which Mr. Hughes mentioned in his evidence would not have been payable unless the existing policy in respect of the crane had been cancelled and another policy had been issued without the ME35A endorsement. An assessment of the amount fairly representing the prejudice to Commercial Union must include the value of the lost opportunity of cancellation determined by reference to the facts as revealed by the evidence. The value of that lost opportunity is, in the events that have happened, equivalent to the liability imposed on Commercial Union by s. 54(1) of the Act. This conclusion involves two further propositions.

First, the liability imposed by s. 54(1) on an insurer is not itself the prejudice to be taken into account. If it were, s. 54(1) would be self-destructive. Here, s. 54(1) imposed on Commercial Union a prima facie liability to pay under the policy by sterilizing the operation of cl. 1(a), but the opportunity which Commercial Union lost was the opportunity to go off risk offered by the right of cancellation conferred by cl. 3(a)(2). In determining the value of that lost opportunity, the fact that the continuance of the risk left Commercial Union exposed to the imposition of a liability by s. 54(1) is material.

Second, the value of that lost opportunity depends on the hypothesis that Commercial Union would have exercised the right to cancel the policy in respect of the mobile crane and would not have issued another policy without the ME35A endorsement. The hypothesis is not an historical fact; the Court must form an estimate of the likelihood of Commercial Union having acted in that way [10] . In the present case, the Court of Appeal by majority found that Commercial Union would have gone off the risk of the crane's overturning had Ferrcom notified it of the registration of the mobile crane and the evidence to support that hypothesis was extremely cogent. The value to Commercial Union of its lost opportunity to go off risk was the value of a right to go off risk which Commercial Union would have exercised.

1. Malec v J. C. Hutton Pty Ltd (1990), 169 C.L.R. 638; The Commonwealth v Amann Aviation Pty Ltd (1991), 174 C.L.R., at pp. 117-121, and cf. Norwest Refrigeration Services Pty Ltd v Bain Dawes (W.A.) Pty Ltd (1984), 157 C.L.R. 149, at pp. 161, 171-173.

It follows that the amount which "fairly represents" the prejudice suffered by Commercial Union in losing the opportunity to go off risk is the equivalent of the liability prima facie imposed on Commercial Union by s. 54(1). The prima facie liability imposed by s. 54(1) is thus "reduced" to nil.

The conclusion reached by the Court of Appeal was right. The appeal should be dismissed.