Section 28(3)
59 Section 28 of the Act provides:
"(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."
60 The trial judge did not deal with the application of s 28 because he found that the plaintiff had not failed to comply with the s 21 duty of disclosure.
61 The defendant submitted that if this Court agreed with its submissions on ss 21 and 22, it followed that liability under s 28(3) should be reduced to nil. This was because of the evidence of Mr McLean. Mr McLean gave the following evidence in chief:
"Q. Yesterday Mr McLean I also asked you some questions about the underwriting position in relation to disclosure of business use and the extent of business use. Like yesterday I want you to assume the questions that I will ask you this morning will be related to the period of December 1994 at the time of the last renewal in respect of the policy that's in issue before this Court. I want you to assume that at that time in respect of Mr Wallace's premises at 39 Anderson Road, Mortdale, that these matters applied. From those premises, Mr Wallace was conducting a business of a tree surgeon which included these features. In association with that business, from the insured premises he ran an office within the premises that was maintained and staffed by a full time employee five days per week during the [hours] of 9 to 5. That otherwise involved in the business apart from Mr Wallace full time and that employee in the office full time, there were two other full time employees. That from the shed of the premises there was the storage of quantities of petrol in the order of up to 60 litres in jerry cans. Quantities of various types of oils stored in 44 gallon drums and 20 litre containers. That there were commercial quantities of fertiliser and peat moss stored at the premises from time to time. That from the premises there was the sawing and splitting of large logs into saleable sized pieces of firewood for sale. From the premises there was performed the mulching of wood and tree cuttings for sale. That there was the commercial sale from the premises of the firewood so produced and the mulch so produced. That from the premises there was performed the fuelling with petrol of items of petrol driven machinery. That on the premises from time to time welding, repairing and maintenance of items of machinery occurred. Are those matters Mr McLean matters that GIO would wish to know about in considering whether or not to renew the policy in December 1994?
A. Yes, those matters are of importance because the household insurance department is in the business of insuring domestic risks only and anything that goes away from that we would need to know about.
Q. So you say yes you would like to know about those matters because they go to your underwriting consideration. The next question I ask you Mr McLean is this. If those matters had of been disclosed to the GIO at the time of renewal in December '94 either to a branch or otherwise, what would have happened?
A. If they had been disclosed to the branch, the branch would have referred those or the situation scenario to Parramatta where I'm located, would have been referred to myself.
Q. And if that matter had of been referred to you with those matters being disclosed, what decision would you have taken?
A. The decision would have been definitely not to issue renewal on that policy.
Q. Mr McLean are matters in the nature of threats made to individual insureds under household policies or threats to the - I withdraw the question. Are threats in the nature of some sort of violence to the insured or the insured's premises matters that are relevant to the consideration of GIO whether or not to issue a policy for building insurance or to renew a policy for building insurance?
A. Yes, depending on what the threat is. We would need to know about it. Just normal - just common sense tells you that there is always neighbourhood disputes across the fence but where there are substantial threats, that would increase the risk of insuring a property. We would need to know about those.
…
Q. Mr McLean, the assumption is that there were no less than three anonymous telephone calls in the nature of threats. That in one there was a threat to blow up the insured, in another there was a threat to pay out on the property and in another there was a threat to get the insured. In addition to those matters, I want you to assume this. That over the one or two - sorry. During and over the one or two years before the renewal in question, that the plaintiff had received several complaints from neighbours concerning noise associated with his business operation emanating from the premises, concerning the storage of wood and tree clippings on the footpath, concerning the amount of wood and tree clippings stored on the premises. In addition to that, I want you to assume that in that same period, one particular neighbour had personally confronted the plaintiff and in a threatening way in close physical proximity to the plaintiff had threatened to get the plaintiff arising out of the plaintiff making substantial amounts of noise from his business operation emanating from the premises. In addition to that, I want you to assume that over that same period of time there was an ongoing dispute between the plaintiff and a former employee arising out of which there had been no less than two separate occasions in which threats to the plaintiff had emanated, one being personally made by the employee at the insured's premises during which the employee said he was going to get the plaintiff and one being relayed to the insured by the insured's sister and that particular threat being in the nature of a threat being made by an employee of the former employee saying that they were going to get the sister and the insured. In addition to that I want you to assume that in the same period that on one occasion the insured had discovered that a piece of business machinery parked under the carport had had one of its tyres set on fire. Mr McLean are those matters that are relevant to the consideration of GIO at December 1994 whether or not to renew the policy?
A. Yes, those matters as you have described would be relevant in our decision on whether to renew that policy.
…
Q. I want you to assume that those - that that additional inquiry or questions were asked and that in response to that, you were told about the nature of the business and what you were told were the items that I previously asked you to assume, that list of matters including the office and the extent of the nature of the business operation. Now if those matters had of been disclosed at that time in association with the further inquiry, what would have happened?
A. Well the renewal would not have been offered because the risk would have increased from that of a normal domestic dwelling.
Q. That decision, is that a decision that would have been made by you or by some one else?
A. That decision would have been made by myself.
Q. So if those type of matters had of been disclosed at a branch, it would have been referred to head office to yourself?
A. Yes it would have.
Q. Mr McLean, I want to take you back to the scenario that I asked you to assume concerning the threats. In that scenario apart from the threats I ask you to assume that also disclosed to you were the existence of complaints from neighbours. If what was disclosed to you on renewal in December 1994 was only the matters of threat that I have outlined to you, but at that same time, there was no separate disclosure of the disputes being held with neighbours, what would have happened?
A. Well the end result would have still been the same. Some one saying that they are going to pay out on the property, that they are going to blow up the insured. Matters like that definitely increase the risk - it's different from a normal domestic risk and the renewal would not have been offered.
Q. The mere disclosure of the existence of threats, does that lead - sorry, is it the case that by itself that does not cause a refusal of insurance?
A. Well it puts you on inquiry as to why the threats were made and then further investigations would have revealed what the operations were from that property and the end result would have been that we wouldn't have offered renewal."
62 In cross-examination Mr McLean agreed that a general medical practitioner might well use a building as both residence and surgery and still receive cover under a policy of the type which the plaintiff had. Mr McLean agreed it was common for Sydney residences to have petrol filled lawnmowers, and that that would not cause the defendant to refuse cover. Mr McLean said he had not conducted any survey of the basis on which the defendant had rejected proposals for insurance of domestic premises which were to be used for business purposes, because proposals were generally destroyed after twelve months in view of space problems. He said he personally had not rejected any such proposal between 1990 and 1994. He said that if the change in use had been disclosed he would have rejected the proposal outright without further inquiry, though he would have made inquiries had the threats been disclosed. After lengthy and not unsuccessful cross-examination designed to move Mr McLean towards an acceptance of the discretionary nature of underwriting, of the fact that minds may honestly differ about it, and of the possibility that inquiries about the length of time a customer had been with the defendant would be made, Mr McLean denied that if the disclosures which the plaintiff ought to have made had been made there would have been any difference of underwriting opinion: "I can't see anyone disagreeing on whether to not renew this policy". In general it may be said that the cross-examination did not in any way cut down Mr McLean's evidence in chief about the change in business use, and it succeeded only in establishing some qualifications about the threats which were not injurious to his credit.
63 On the appeal the plaintiff accepted that Mr McLean was not cross-examined to suggest that the plaintiff would have been offered cover after disclosing what he should have disclosed, but at a higher premium. Nor did the plaintiff at the trial give evidence of what higher premium he might have been prepared to pay.
64 The plaintiff submitted that because of the trial judge's failure to make findings on the s 28(3) issue, if the defendant succeeded in other respects there would have to be a new trial. Whether Mr McLean's evidence should be accepted raised credit questions on which, according to the plaintiff, it was not appropriate that this Court should rule.
65 Part 51 rule 23(1) of the Supreme Court Rules provides:
"(1) The Court of Appeal shall not order a new trial:
(a) on the ground of misdirection, non-direction or other error of law;
(b) on the ground of the improper admission or rejection of evidence;
(c) where there has been a trial before a jury, on the ground that the verdict of the jury was not taken upon a question which the trial judge was not asked to leave to the jury; or
(d) on any other ground,
unless it appears to the Court of Appeal that some substantial wrong or miscarriage has been thereby occasioned."
66 Here the "ground" on which a new trial would be ordered is the trial judge's failure to make findings about s 28(3). Did that failure occasion some substantial wrong or miscarriage? Counsel for the plaintiff on the appeal said that if there were no order for a new trial, he would have to ask this Court to make findings adverse to Mr McLean's credit, and he did not think he could do this. That is understandable. There is nothing in the trial judge's reaction to Mr McLean's evidence as it was being given suggesting criticism of it. While the trial judge intervened to stop one non-responsive answer, he did not otherwise rebuke Mr McLean. Counsel for the defendant said, without contradiction, that no submission was made at trial on behalf of the plaintiff challenging Mr McLean's credit, and that proposition is supported by the firm but non-pejorative style of cross-examination employed by the experienced senior counsel who represented the plaintiff at the trial. Though the trial judge criticised the evidence of the plaintiff, he made no criticism of any other witness, and his findings about the plaintiff's receipt of the renewal notices and the 1994 policy rest in part on an acceptance of Mr McLean's evidence on the standard procedure of the defendant. The trial judge's findings about the changes in business activities at the premises are based in part on Mr McLean's evidence. The trial judge referred to "s 28(3) of the Act and the evidence of Mr McLean that insurance would not have been renewed" as a justification for the requirement that the plaintiff prove knowing non-compliance with the duty of disclosure: whether or not that was the right test, the trial judge's reasoning reveals some provisional acceptance of Mr McLean's evidence. (The acceptance is provisional only, because a little later the trial judge said that because of the defendant's failure on s 21 issues "it becomes unnecessary to consider Mr McLean's evidence as to what the insurer would have done if there had been disclosure".) In short, the trial judge's approach to Mr McLean's evidence in his reasons for judgment is not hostile and indeed is favourable. There is nothing in Mr McLean's evidence which could cause this Court to doubt Mr McLean's veracity or reliability. His veracity was not challenged by the cross-examiner. His reliability was tested, but not shaken. And in giving evidence he appeared to make all just concessions. Nor is there anything in Mr McLean's evidence which would cause this Court to think that the trial judge erred in his apparent acceptance of Mr McLean's evidence that insurance would not have been renewed. In the circumstances the trial judge's failure to make fuller or more explicit findings on that subject does not represent a substantial wrong or miscarriage in view of this Court's capacity to accept his evidence.
67 Mr McLean's evidence should be accepted by this Court. Acceptance of it leads to the conclusion that the defendant's liability should be reduced to nil.
68 In the course of the argument in this Court, the question was raised whether, if disclosure years before the relevant contract of the matter which the plaintiff ought to have disclosed would have caused an anterior contract not to have been entered, it was still possible for the defendant to rely on the non-disclosure in relation to the relevant contract. However, the plaintiff did not advance any argument on this point as a means of preventing the application of s 28(3).