To say that an insurer must act reasonably in forming or declining to form an opinion is not to say that a Court can substitute its own view for that of the insurer. As North J pointed out in Doyle at 529, "reasonable persons may reasonably take different views". Unless the view taken by the insurer can be shown to have been unreasonable on the material then before the insurer, the decision of the insurer cannot be successfully attacked on this ground."
48 The appellant challenges the existence of any such obligation. In Edwards, as here, the policy was not taken out by the employee with the insurer but by the proponent of the scheme. Thus, in Edwards the policy was taken out by the actual employer with the insurer. Here, it was taken out by the affiliated trustee of the scheme. In each case, this was part of the superannuation plan. The only difference was that in Edwards the employer was the proponent of the plan whereas here there is a trust scheme with an employer-affiliated trustee. That cannot matter. In each case, benefits were to be funded out of the policy, payable upon the member becoming "totally and permanently disabled". This was, in Edwards, according to a definition agreed from time to time by the employer with the insurer. Here the terms were incorporated by reference to the policy. There is again no material difference. Finally, each set of terms is predicated on the opinion of the insurer. The only additional feature in Edwards is that this is "after consideration of such medical or other evidence as it [Zurich] may require".
49 I do not consider any of these features render Edwards distinguishable from the present case. I have earlier referred to the observations of Mahoney JA, relied on by the trial judge at [79] allowing extension of "the application of the duty of utmost good faith among persons who are not strictly contractual parties to an insurance policy". It is not clear whether Mahoney JA intended to limit himself to what he described as "trust" and "benefit" cases or, perhaps, cases analogous to these. The trial judge evidently took a broad view of the duty when he concluded that "in my opinion the standing [to sue] is related to the duty of good faith in exercise by an insurer of rights under the contract including the right of controlling the settlement of claims; see [C E Heath Casualty and General Insurance Ltd v Grey & Ors at 39] ... In my opinion the observations of Mahoney JA support the view that a person other than a contracting party may have standing to challenge the effectiveness of an opinion formed by an insurer". (His Honour appreciated that these observations of Mahoney JA were obiter.)
50 For reasons which I develop below, I agree with his Honour's conclusion that the nature of the insurer's obligation was as stated in Edwards but I do so on two bases. The first is that the duty of good faith applies where the policy is at least for the indirect benefit of the insured, as evidenced here not only by the reference in the policy to each of the employees as "the Insured Person" but also by its availability to fund payments to them via the Trustee. The second is based on the reasoning in Trident, though derived incrementally. I start however with the appellant's argument challenging the proposition that Edwards is dispositive of the present case.
51 The appellant submits that the essence of McClelland J's decision in Edwards appears from the last sentence in the passage cited by Bryson J at [81] and which I have quoted above. There McClelland J said, "unless the view taken by the insurer can be shown to have been unreasonable on the material then before the insurer, the decision of the insurer cannot be successfully attacked on this ground" [emphasis added].
52 On this basis, the appellant contended that in opinion cases all the court could enquire into was whether the decision could, effectively, be supported by the material considered by the insurer.
53 This reading essentially negates that which is stated in the earlier two paragraphs and in particular the first paragraph quoted, at least so far as opinion cases are concerned. McClelland J there stated that "[F]urthermore in the exercise of powers affecting the interests both of itself and the claimant, [Zurich] was under a duty of good faith and fair dealing which required it to have due regard to the interests of the claimant". That duty informing the exercise of the Trustee's discretion is thus predicated very broadly to require the Trustee to have regard to the interests of the claimant employee, whether or not the direct beneficiary of the policy. It affected not only the insured but also the claimant employee.
54 Taking the three paragraphs of the quoted passage together, I consider that what his Honour intended was to delineate the duty of good faith and fair dealing common to cases where a favourable opinion was required to be formed by the insurer as a condition of the employee receiving a benefit as well as cases where that was not a condition. That duty, I emphasise, constituted a bilateral obligation between both insurer and claimant, for the benefit of both. Then, for those policies dependent on the insurer forming a favourable opinion as to whether the employee qualified, there was a related but distinct duty to act reasonably in forming or declining to form that opinion. There would be little point in a duty of good faith and fair dealing if it were essentially supplanted by the duty merely to act reasonably in those cases where rights or liabilities depended upon an opinion about something, here an opinion about total and permanent disablement. What McClelland J was directing his mind to in the third paragraph, as is clear from the earlier quoted part, was that a court must not substitute its own view for that of the insurer, by reference to additional material not before the insurer. There is no suggestion of that here. Rather the question here concerns the obverse. What was alleged was a failure on the part of the insurer, in denying itself the further material it could have received from the employee. This was an employee response to the video and the two medical reports, had the employee been invited to make such a response, or at least been placed in a position to provide such a response if he so chose. (Hannover argues that it did do the latter, a proposition disputed by the employee; see later.)
55 There is, however, a further consideration. That is the applicability of this bilateral obligation of utmost good faith in a situation where the insured is not the employee concerned or other third party but, as here, the trustee of the fund. It was the Trustee who effected insurance in order to fund liabilities that may arise in relation to that employee. As a matter of principle, should the obligation of utmost good faith apply in such circumstances? Here, the appellant places particular reliance on the trial judge's disavowal of any reliance on Trident General Insurance Co Ltd v McNiece Bros Pty Ltd as removing that basis for the conclusion reached by the trial judge that the duty of utmost good faith applied.
56 I consider that the decision in Trident does indeed afford a principled basis for attributing the duty of good faith and fair dealing to Hannover in its dealings with Mr Sayseng, notwithstanding that Mr Sayseng was neither a party to the insurance contract nor within the class of persons expressed to be insured by it. However, as I later explain, attribution of that duty need not depend upon the analogical extension of the reasons which led Mason CJ and Wilson J, and also Toohey J, to conclude as they did in Trident General Insurance Co Ltd. (The reasons of Gaudron J depended upon principles of restitution but led to the same result.) Such a result can be reached based on the reasoning of Mahoney JA in C E Heath Casualty & General Insurance Ltd v Grey, to which I have earlier made reference, that such policies are essentially for the benefit of the employee, albeit indirectly.
57 In their joint judgment Mason CJ and Wilson J noted the relative lack of antiquity of the doctrine of privity (at 113-4) and the criticisms made by Law Reform Commissions and otherwise of its harsh application (at 116-7). They concluded that insistence on privity of contract to deny a right to enforce a contract of insurance at the suit of a member of the class of persons expressed to be insured by it was unjust because it would result in (a) failure to give effect to the express intention of the party who effects the insurance, (b) failure to give effect to the common intention of the parties including the insurer, to benefit third parties, and (c) injustice to these third parties who, having been made aware of the existence of the policy, have ordered their affairs accordingly. Thus at 123-4 they conclude: "In the nature of things the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rules should be shaped with that likelihood in mind." In the present case, Mr Sayseng was likewise forced to rely on payment by Hannover to the Trustee under the policy to, in turn, enable payment by the Trustee to him from the Fund, as I further explain below.
58 Reliance, however, is not an ingredient of the third party's cause of action on Trident principles. Rather it simply explains the public policy underlying the exception to the privity doctrine in this setting, a point emphasised in Woodside Petroleum Development Pty Ltd v H & R - E & W Pty Ltd (1999) 20 WAR 380 at 399-402.
59 Toohey J agreed with the reasoning of Mason CJ and Wilson J. For the purpose of the decision he confined the exception to public liability insurance but then observed (at 163) "… it would be unreal to think that a decision upholding the Court of Appeal would not have implications for privity of contract in other situations. And the disposition of this appeal inevitably takes the Court into areas that lie outside the field of insurance".
60 Gaudron J (at 173) agreed generally with the reasons of Mason CJ and Wilson J but differed in a significant respect when she stated: "The right of the third party is not a right to sue on the contract: rather it is a right independent of, but ordinarily corresponding in content and duration with, the obligation owed under the contract by the promisor to the promisee." Her Honour based her decision in favour of the third party not on contract but on unjust enrichment, affirming that this was "not an abrogation of the doctrine of privity of contract" (at 177).
61 Brennan and Dawson JJ in dissent rejected any exception to the doctrine of privity, holding that there was no remedy in contract in the circumstances. Deane J considered that, although there was no contractual remedy, a trust in favour of McNiece had arisen, and so formed one of the five who upheld the appeal, though on different grounds.
62 When one turns to the circumstances of this case, the principal difference to the cases referred to is that instead of the policy being one in which the proceeds go directly to the employee in respect of the coverage of that employee, the coverage is of the Trustee's liability with respect to that employee and the proceeds go directly to the Trustee. That said, the employee is benefited by the existence of the policy and, indeed, is wholly dependent upon the policy in terms of the quantum of benefit paid. This arises in several ways:
(i) Rule 10(1) leaves it entirely to the Trustee to effect a policy of reinsurance to secure part or all of the benefits payable in accordance with the Rule. Rule 10(5)(a) provides that if insurance in relation to a particular member is not required " the trustee may exercise its discretion to pay a benefit in the event of the total and permanent disablement of the Member ". This is, therefore, a matter of discretion not right, so that the employee would be particularly vulnerable if denied any rights vis-à-vis the insurer.
(ii) Rule 10(2) provides that if the insurer refuses to insure at its standard premium rates or for any reason refuses to insure or to pay any part of the required sum, "the trustee in its discretion may reduce the benefit payable pursuant to sub-rule (1) of this Rule by part or all of the sum insured refused." This again emphasises both the benefit to the employee from the policy being effected by the Trustee and the dependence of the employee on the policy obligations being performed by the insurer.
63 The trial judge observed that
"there was no basis for Mr Sayseng nor any other Insured Person to assume that insurance by Hannover was effectively available to them personally, or available in any other manner than the indirect path of their having an entitlement to payment from the Kellogg Retirement Fund, with the Trustee having a corresponding entitlement under the Group Life Contract to have insurance money paid into the Fund. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd related to provisions which in explicit terms purported to extend insurance to sub-contractors." (at [78] Red, 56)
64 That said, Mr Sayseng depended upon this "indirect path" not being obstructed by the insurer's unfair dealing towards him. Equally, the insurer depended on Mr Sayseng performing his related obligation of utmost good faith, particularly in matters of disclosure. It therefore should be recognised that a failure by the insurer to give effect to the requirements of the policy, including an obligation of utmost good faith to both the Trustee and employees, would result in a failure to give effect to the expressed contractual intention of the Trustee, namely, to provide retirement benefits to employees. That would indeed result in a failure to give effect to the common intention of the parties, so causing injustice to the third party employee. While the latter may not be taken to be aware of all the details of the policy, he must be taken to be aware of the existence of the policy and to have ordered his affairs accordingly. He may well have made contributions and undertaken employment with the assurance that, if he suffered total and permanent disablement, there would be cover for that contingency.
65 All these are matters which led to Mason CJ and Wilson J to conclude that
"in the nature of things the likelihood of some degree of reliance on the part of the third party in the case of a benefit to be provided for him under an insurance policy is so tangible that the common law rule should be shaped with that likelihood in mind."
66 Here, indeed, while "the benefit to be provided for him" does not involve a direct payment by the insurer to Mr Sayseng under the policy, any payment by the Trustee from the Fund to that employee is directly underpinned by, and dependent on it receiving payment under the policy; see Rule 10(2) earlier quoted. It is entirely in accord with the rationale for abandoning strict application of the privity doctrine in an insurance context to extend its application to a retirement or disability plan which is so underpinned. Comparing the position to the insured subcontractor in Trident, there is no relevant difference in principle. Indeed, insofar as the employee makes a contribution to the costs of insurance, the case is even stronger.
67 In recent times, there have been two cases which were in a sense precursors of the situation presently before this Court.
68 Verinder v Australian Institute of Steel Construction Ltd (2004) 13 ANZ Ins Cas 61-589, was decided fourteen days before the decision of the primary judge. It deals with a similar policy under which, on the occurrence of disability in the employee, the insurance company would make a payment to the employer. One of the issues for determination in that case was whether Verinder, the employee, could make a direct claim on the insurer. As it happened, Verinder was not an "Insured Person" (he did not meet a threshold condition). But by way of dicta McDougall J at [48] made the observation that:
"… were it necessary to do so, I would have considered the issue on the basis that the evidence showed that:
1. The policy was taken out by AISC not for its own benefit, or to indemnify it for any liability that it had assumed to its employees, but for the benefit of its employees; and
2. With the exception of benefits under cl 3.12 of the policy (waiver of premium benefit), all benefits under the policy accrued to the employees of AISC so that, if AISC made a claim, the claim would be made for the benefit of the sick or injured employee."
69 Similarly, in Cigna Insurance Asia Pacific Ltd v Packer [2000] WASCA 415 the insured was the employee but the payment was to be made to the policyholder. That case was a limitations case but at [23] it was accepted that the employee could make a direct claim
"on the same basis as the contractor, who was not a party to the insurance contract, but was within the definition of the "Insured", in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107."
70 Accordingly, I would go further than the trial judge who restricted himself to concluding that Mr Sayseng had standing to challenge the Trustee's determination, but fell outside the decision in Trident. Thus, I would conclude that Mr Sayseng, though not entitled to the proceeds of the policy, was entitled to the same obligation of good faith and fair dealing as was owed by the insurer to the Trustee, taking account of their respective positions. That obligation, being a bilateral one, enures also for the benefit of the insurer as Mahoney JA observed in C E Heath Casualty and General Insurance Ltd v Grey (supra) at [36]:
"In my opinion, a third person involved in a transaction of insurance may be bound by the principle of uberrima fidae (utmost good faith) and, to the extent he is, may be under a duty to disclose facts affecting the insurance; however, the extent of the duty imposed on the third person will depend on the circumstances of his involvement."
71 Were the Trident outcome to be based on the principle of unjust enrichment in the manner articulated by Gaudron J, the obligation of good faith and fair dealing would operate independently of the insurance contract, so avoiding the unjust enrichment that would otherwise be enjoyed by the insurer where a legitimate claim under the insurance policy was not able to be pressed against the insurer to the detriment of the employee third party.
72 However, even if the Trident principles were inapplicable to the present case because of the differences between the facts of that case and this, I consider that the duty of good faith and fair dealing should nonetheless apply as between insurer and third party employee. I do so given the latter's total dependence on payment by the insurer to the Trustee in circumstances where that must have been appreciated by all parties to the tripartite arrangement and because, in particular, the policy is held by the Trustee for "the benefit" of the employees in the wider sense of benefit; cf Mahoney JA in the earlier quoted passage from C E Heath Casualty & General Insurance Ltd v Grey at 37-8.
73 I turn now to the second issue in the appeal, namely, that even were there a duty of good faith and fair dealing, that duty was not breached as there was no lack of fair dealing by Hannover in its consideration of the matter. To quote from the appellant's submissions:
"The experts retained by Hannover, as well as the experts retained by Trustee and the Plaintiff were all concerned to determine whether the lower back problems of the First Respondent had at the relevant time caused him to be totally and permanently disabled within the meaning of the policy. Quite unlike the position in Beverley [Beverley v Tyndall Life Insurance Co Ltd [1999] WASCA 198], the reports of Dr Funnell and Ms Gosling did not propose a completely different cause of the First Respondent's problems that required him to have the opportunity to answer the new cause. There was simply a difference of medical opinion, although it is to be noted that the views of Ms Gosling did not significantly differ from the views of two doctors retained by the Trustee, Dr Mitchell (see at para [35]) and Dr Billett (see at para [36])."
74 It is true that Beverley was a clear case of non-disclosure of a critical matter by the insurer. What there occurred was that after a fall in her home in which the insured suffered a slipped disc, she made a claim on the policy. Unknown to her, the insurer obtained its own expert reports on the insured and as a consequence of those reports, never disclosed to the insured, rejected her claim.
75 Ipp J gave the lead judgment, not only upholding an appeal on the merits but also a second ground based upon the insurer's duty to "act fairly, in good faith and reasonably" at [91]. Ipp J held (at [94]) that to withhold the information meant that the insured, instead of being able to answer the information on its merits, was left in a position where she had to challenge the reasonableness of the decision. Malcolm CJ agreed at [12] to [16] while Sanderson J preferred not to discuss this ground.
76 The distinction sought to be drawn in the present case is that what was not disclosed were two additional medical reports obtained by the insurer from its experts, namely Dr Funnell and Ms Gosling, coupled with the surveillance tapes or videos that it had obtained and forwarded to its experts and which were specifically relied upon by Dr Funnell.
77 The trial judge's conclusion (at [93] to [94] Red, 63-4) concerning the two reports was as follows:
"[93] In my opinion it is striking that there was no flow of information back from Hannover to Mr Sayseng about the investigations which Hannover caused to be made. The private investigator's report and film were not notified to Mr Sayseng. If they had the neutral significance suggested by the private investigator's report itself, not passing them on to Mr Sayseng was of no importance; however the film acquired some significance because Dr Funnell made an adverse interpretation based on it. The severely adverse report of Dr Funnell, and the equally severely adverse report of Ms Gosling were not passed on to Mr Sayseng for comment. Doctor Funnell's report is dated 12 January 2000. It was passed to Mercer by Hannover on 24 January 2000. Ms Gosling's report was given after an assessment on 14 March 2000 and was passed by Hannover to Mercer on 10 April 2000. The letter declining the claim of 27 April 2000 followed without there being any further representation or communication from the Trustee to Hannover and indeed without there being an opportunity for the Trustee to respond. There was also no offer to Mr Sayseng of an opportunity to comment, and there was not even communication of the reports to Mr Sayseng.