McArthur v Mercantile Mutual Life Insurance Company Ltd [2001] QCA 317

SUPREME COURT OF QUEENSLAND

CITATION: McArthur v Mercantile Mutual Life Ins Co Ltd [2001] QCA 317

PARTIES: JEFFREY ROBERT McARTHUR / (plaintiff/appellant) / v / MERCANTILE MUTUAL LIFE INSURANCE COMPANY LIMITED ACN 009 657 176 / (defendant/respondent)

FILE NOS: Appeal No 5793 of 2000 / DC No 69 of 1997

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: District Court at Beenleigh

DELIVERED ON: 10 August 2001

DELIVERED AT: Brisbane

HEARING DATE: 8 June 2001

JUDGES: McMurdo P, McPherson JA, Muir J / Separate reasons for judgment of each member of the Court, each concurring as to the order made

ORDER: Appeal dismissed with costs

CATCHWORDS: INSURANCE – GENERAL – POLICIES OF INSURANCE – CONDITIONS PRECEDENT – Where insured made claim on insurance policy on grounds of total permanent disability – where insurer’s opinion that insured likely never to work again is a precondition to the obligation to pay under the policy – where opinion formed improperly – whether claim lies in debt or in damages for breach of contract - whether Court can have regard to evidence which came into existence after the determination by the insurer / Insurance Contracts Act 1984 (Cth), s 7, s 13, s 48(1) / Property Law Act 1974 (Qld), s 55 / Sale of Goods Act 1896 (Qld), s 12 / Beaufort Developments (N I) Ltd v Gilbert-Ash N I Ltd [1999] 1 AC 266, cited / Braunstein v Accidental Death Insurance Co (1861) 121 ER 904, considered / Butcher v Port (1985) 3 ANZ Insurance Cases 60-638, discussed / Chammas v Harwood Nominees Pty Ltd (1993) 7 ANZ Insurance Cases 61-175, referred to / Diggle v Ogston Motor Company (1915) 112 LT 1029, referred to / Edwards v Aberayron Mutual Ship Insurance Society (1876) 1 QBD 563, discussed / Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Insurance Cases 61-113, discussed / Heitman v Guardian Assurance Co Ltd (1992) 7 ANZ Insurance Cases 61-107, cited / Hickman & Co v Roberts [1913] AC 229, discussed / Ivkovic v Australian Casualty & Life Limited (1994) 10 SR (WA) 325, considered / Jackson v Swift Australian Company Pty Ltd [1968] QdR 1, considered / Moore v Woolsey (1854) 119 ER 93, considered / Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd [1947] AC 428, discussed / Napier v UNUM Ltd [1996] 2 Lloyd’s Rep 550, referred to / Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, referred to / Teur v London Life Insurance Co [1936] 1 DLR 161, referred to / Williamson v John I Thornycroft & Co Ltd [1940] 2 KB 658, referred to / Wyllie v National Mutual Life Association of Australasia Ltd, SC NSW 50094 of 96, 18 April 1997, referred to / Young v Queensland Trustees Ltd (1956) 99 CLR 560, referred to

COUNSEL: D O North SC, with J B Rolls, for the appellant / R C Morton for the respondent

SOLICITORS: Rees R & Sydney Jones for the appellant / Bain Gasteen for the respondent

McMURDO P: I agree with the reasons for judgment of Muir J and with the order he proposes.

McPHERSON JA: The plaintiff, who is the appellant in this Court, brought proceedings in the District Court at Rockhampton claiming from the defendant as insurer the sum of $80,000 payable under an insurance contract, or in the alternative $120,000 as damages for breach of that contract. The difference in the two amounts claimed is apparently accounted for by the incorporation of a claim for compound interest in the damages sought to be recovered. The contract, which has on it a date of 4 January 1994, is described as a Group Life Contract and was made by the defendant with BHP Australia Limited as employer and BHP Australia Coal Unions as Proponent, of which the plaintiff was respectively an employee and a union member. It is addressed to those Unions as Proponent, and recites that:

"… we hereby agree to the extended cover and to pay to you Agreed Benefits with respect to Insured Persons on the basis as set out in and subject otherwise to the terms and conditions of this Contract."

The contract is evidently not a life policy in terms of ss 9 and 9A of the Life Insurance Act 1995.

Clause 4(a) of the Conditions states that the "circumstances in which the Agreed Benefits are payable are set out in this Contract". Agreed Benefits are defined as those the defendant has agreed to pay with respect to an Insured Person as indicated in the Schedule. There is no dispute that the amount of the Agreed Benefits is $80,000 and that the Plaintiff is an Insured Person under the contract. The extent of the cover described in Condition 1 is that "if the Insured Person dies or suffers Total and Permanent Disablement ... we shall pay to you the Agreed Benefits". Total and Permanent Disablement is defined as follows:

"(a) suffering the loss of the use of two limbs or the sight of both eyes, or the loss of the use of one limb and the sight of one eye (where limb is defined as the whole hand or the whole foot), or

(b) in the case of an Insured Person who is engaged in a gainful occupation, business, profession or employment -

(i) the Insured Person is totally unable to and does not in fact engage in that gainful occupation, business, profession or employment, as a result of an injury or illness for a consecutive period of six (6) months, and

(ii) after that period of six (6) months, we are of the opinion that, as a result of that injury or illness, the Insured Person is disabled or incapacitated to such an extent as to render the Insured Person likely never to be engaged in any gainful occupation, business, profession nor employment, for which the Insured Person is reasonably suited by training, experience or qualification."

The plaintiff is not himself a party to the contract of insurance, and in para 4 of the defence the defendant originally took the point that he could not sue on it. The question does not seem to have been pursued at the hearing presumably because s 48(1) of the Insurance Contracts Act 1984, which applies to contracts of general insurance, enables a person not a party, but to whom the insurance cover extends, to recover the amount of his “loss” from the insurer. The word “loss” is not defined in the Act and does not seem especially apt to describe a money sum like the Agreed Benefits of $80,000 payable on the happening of a particular event and so recoverable as a debt on proof of that event. The common law, it was said in Young v Queensland Trustees Ltd (1956) 99 CLR 560, 567, “does not and never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract: it is rather the detention of a sum of money …”. But it is probably being unduly technical to deny to non-payment of $80,000 the character of a “loss” within the meaning of s 49(1) of the Act. In the old language of the law, it would have attracted an action on an implied promise to pay arising form the indebtedness (indebitatus assumpsit). In any case, even if s 49(1) does not apply to it and s 7 of the Act is given full effect, it would probably be open to the plaintiff to rely on s 55 of the Property Law Act 1974 as a beneficiary having the right to enforce the duty imposed on the defendant under the contract of insurance. The question was not raised on appeal and is mentioned here only to show it has not been overlooked.

Returning to the definition of Total and Permanent Disablement, what happened in this instance is that the plaintiff was initially absent from work from about February or March 1991 until June 1993. In March 1991 he was diagnosed as suffering from chronic fatigue syndrome, but began a gradual return to work in June 1993. Then in June 1994 he suffered a hernia, and in July 1994 again reported sick with chronic fatigue symptoms. His employment was terminated in February 1995. On 28 March 1995 a claim for payment of benefit under the contract was lodged by the plaintiff on the basis that he was totally and permanently disabled.

The plaintiff was not disabled in a way that brought him within the ambit of para (a) of the definition of Total and Permanent Disablement. So far as para (b)(i) is concerned, there is no dispute. He had not engaged in gainful employment for a consecutive period of 6 months. The requirement of para (b)(ii) is, however, cumulative upon that in (b)(i) and refers to events after the first 6 month period has elapsed. Agreed Benefits of $80,000 become payable if, after that initial 6 month period, "we are of opinion" that the Insured Person is disabled or incapacitated to such an extent as to render him "likely never to be engaged in any gainful … employment, for which [he] is reasonably suited …" by training etc.

The plaintiff's claim to be considered under para (b)(ii) of the definition was accompanied by material from various sources, including reports from Dr Holford and Dr Kemp. Having considered it, the defendant decided to defer its decision until July 1996. No question is raised about its power to do so. Then, after the plaintiff's solicitor had forwarded a report from Dr Mulholland, the defendant sent a series of specific questions to that psychiatrist. He responded by letter on 27 September 1996. After reviewing the material again in October 1996, the defendant wrote a letter dated 14 October 1996 (ex 14) declining to admit the plaintiff's claim, and, as the learned judge held, finally rejecting it.

The action was commenced on 29 May 1997. As a first step, the judge on 9 December 1998 determined that, in making its decision to reject the plaintiff's claim, the defendant had misconceived the test to be applied. The definition in para (b)(ii) called for determination of whether or not the plaintiff was "likely" never to be engaged in any gainful occupation. The defendant had, his Honour found, adopted the recommendation of its Chief Medical Officer, "which explicitly rejected a probability test". In consequence, he held that the defendant had applied an incorrect test in arriving at its decision to reject the plaintiff's claim. His Honour set that decision aside (as he expressed it) and directed the Registrar to fix a time for a hearing with a view to determining the question whether the plaintiff was, in terms of para (b)(ii) of the policy definition, totally and permanently disabled. On one view of it, the parties, or at any rate the plaintiff, had been expecting the trial judge to arrive at a final determination of the action at the hearing which concluded with the judgment given on 9 December 1998. As has been seen, however, a further hearing was contemplated by the order made on that date. It took place before the same judge and resulted in a further judgment given on 8 June 2000. It is against that decision that this appeal has now been brought.

As I see it, an initial difficulty for the plaintiff lies in the form in which the insurance contract, and in particular the definition in para (b)(ii) of Total and Permanent Disablement, is expressed. In Condition 1 (Extent of Cover) the defendant undertakes to pay the Agreed Benefits if an insured person dies or suffers Total and Permanent Disablement as defined. Paragraph (b)(ii) of that definition makes that state of affairs depend on the formation of an opinion on the part of the defendant that the plaintiff is never likely to be gainfully employed, etc. In the absence of that opinion, it is, on the face of it, difficult to see how the plaintiff can succeed in a claim for the sum of $80,000 as an accrued indebtedness. It is only when that opinion is formed that the obligation to pay and consequent indebtedness arise.

I would, however, not have doubted the plaintiff’s right to recover damages for the defendant’s breach of contract in failing to form its opinion under para (b)(ii) in accordance with the terms of the insurance contract. If, in consequence of having applied the wrong test in its determination of that question, the defendant rejected the plaintiff’s claim, then it repudiated the contract, or at least committed a breach of it, and so incurred a liability to the plaintiff in damages. It is implicit, if not explicit, in the contract that the defendant will form and communicate an opinion under para (b)(ii), and, if the opinion is fatally flawed, it is not an “opinion” within the meaning of that provision. Nor is it a question of setting it aside. Considered as an opinion, it is ineffectual, invalid or void, and, once that is established, it may be disregarded altogether. Having originally said it ought to be “set aside”, the trial judge later rightly acknowledged that it might have been better to have declared it of no effect. One must not in a contractual context like this slip into the language or methods of judicial review. The court is not concerned here with an act or decision in excess of a statutory power or duty, but with the question whether an opinion conforms to the requirements of the contract definition in para (b)(ii).

That a party is entitled to sue for damages for breach of an express or implied contractual obligation to form a conforming opinion seems to me to be clear in principle and supported by authority. In Jackson v Swift Australian Company Pty Limited [1968] Qd R 1, 6, Mack CJ accepted that failure to exercise a discretion honestly would sound in damages. That was a case in which the defendant employer had refused to exercise its discretion under a superannuation deed or contract with the plaintiff employee enabling the defendant to take into account his service with a subsidiary of the defendant. I do not read the reasons of Hanger J, with whom Gibbs J agreed, as questioning the proposition that, if the plaintiff had pleaded and proved that the defendant had not exercised its discretion honestly, the action would have succeeded. Their Honours seem clearly enough to have regarded the decision in Diggle v Ogston Motor Company (1915) 112 LT 1029 as authority for saying that the repository of a contractual discretion is bound to exercise it honestly. The duty of utmost good faith implied by s 13 of the Insurance Contracts Act 1984 leads to the same conclusion. On the other hand, in applying that decision as they did, and consistently with its reasoning, their Honours rejected the notion that if the discretion was exercised, or the opinion was formed, honestly but not reasonably, it then became a matter for the court to determine what the result should be and then substituting its own view of what is reasonable. An editorial note in [1968] Qd R 1 at 13, records that leave to appeal from that decision was refused by the High Court.

In that respect, a failure or refusal to exercise the contractual discretion or to form the requisite opinion in conformity with the contract bears some analogy to contracts for sale at a valuation where the price is to be fixed by a third person. If one of the parties prevents the valuation from taking place, he is in breach of the contract and liable in damages to the other party. See Wenning v Robinson (1964) 64 SR (NSW) 157, 167-168, where the authorities are collected by Asprey JA; and also s 12(2) of the Sale of Goods Act 1896, which codified earlier decisions on the subject. It does not follow, however, that the court has the power of filling the void by supplying the missing element; and both s 12(1) of the Sale of Goods Act and the decision in George v Roach (1942) 67 CLR 253 suggest that there is no contract at all if the valuer’s failure to fix the price occurs without default of either party.

In the case before us, however, it was the defendant itself that failed to form the requisite opinion in accordance with the contract, and the plaintiff was entitled to damages for its failure to do so. Those damages would presumably be measured by the value of the opportunity lost. On showing that the defendant, if it had formed an opinion in conformity with the contract, would probably have concluded that the plaintiff was totally and permanently disabled, the plaintiff would be entitled to recover the full amount of $80,000 as damages. Otherwise he would recover something less, or in some circumstances perhaps nothing at all apart from nominal damages for the defendant’s breach of contract. In assessing damages for that lost opportunity, it might be necessary to consider whether if, after receipt of the defendant’s letter of 14 October 1996 (ex 14), the plaintiff had returned to the defendant with further material in support of his claim, the defendant might not have accepted the claim. That would go to the extent of the opportunity lost. In fact, however, the trial judge found, either directly or in effect, that the letter constituted a final and definitive refusal by the defendant to be bound by the contract. By instituting these proceedings without making a further attempt to persuade the defendant to arrive at a different opinion, the plaintiff must, I consider, be regarded as having accepted that repudiation.

Whatever the stance adopted in the court below, on appeal the plaintiff specifically refrained from claiming damages for a breach of contract by the defendant. By that stage, his right, if any, to the sum of $80,000 as a debt due to him, must be taken to have already accrued. If it had not, he would not have been entitled to enforce it: see Wigan v Edwards (1973) 47 ALJR 586; at least that is so unless he first amended his plaint under UCPR 376(2). No such amendment was sought or made. If, as I think, the opinion under para (b)(ii) is an element in his cause of action to recover the money sum, the difficulty, as I have already mentioned, is that he did not when he instituted the action, or at any other time, have an opinion of the defendant that he was totally and permanently disabled. How then could he mount a claim for the sum of $80,000 as Agreed Benefits under the contract?

The tendency of insurers to stipulate in their contracts or policies that their liability to pay rests on the formation of an opinion or satisfaction on their part is not a recent phenomenon. It goes back at least as far as the second half of the 19th century, and seems to have been the product of a well founded belief that juries commonly found verdicts against them. Courts do not unduly favour insurers. In Moore v Woolsey (1854) 4 El & Bl 243; 119 ER 93, the policy contained a condition giving the right to recover on proof of the claimant’s interest in the policy moneys being provided “to the directors to their satisfaction”. Lord Campbell CJ, in giving the judgment of the Queen’s Bench, said (at 256) that all that was necessary was that proof should have been laid before them with which reasonable men would be satisfied, “and then the inference arises that the proof was to their satisfaction”. That perhaps suggests a form of estoppel. In Braunstein v Accidental Death Insurance Co. (1861) 1 B & S 782; 121 ER 904, which was another instance of a policy requiring “proof satisfactory” to the directors before payment, the Court was prepared to construe the condition as meaning “proof reasonably satisfactory” to the directors. It was precisely that step that the Divisional Court in Diggle v Ogston Motor Co. and the majority of the Court in Jackson v Swift Australian Company declined to take. In a much more recent decision, Tuckey J in England evidently considered the earlier two decisions as confined to matters of proof, which for convenience he referred to as “vouching”. In Napier v UNUM Ltd [1996] 2 Lloyd’s Rep 550, 553, his Lordship said:

“But I do not equate the obligation to produce proof satisfactory, which is apt to describe vouching, with a stipulation that the insurer’s decision to reject an adequately vouched claim cannot be disputed in the Court on the grounds other than good faith. I believe that very clear words would be required to achieve that result.”

The matter has not received much further consideration in England.

The present case is, as I see it, not strictly a matter of producing proof satisfactory to the defendant. The “opinion” in para (b)(ii) on which the plaintiff claims $80,000 is not in terms referable to proof of any kind. Nevertheless, when a similar question arose in New Zealand in Butcher v Port (1985) 3 ANZ Insurance Cases 60-638, the Court of Appeal was not deterred by the presence in a policy of a condition that left the insurer’s liability to rest on the satisfaction of a veterinary representative, appointed by the insurer, that a prize bull had been injured by accident in the course of a sea journey from England. The Court’s decision in that case involved three steps. The first was that, on the evidence, the representative’s opinion was wrongly formed and was consequently of no effect; the second that, not having formed a valid opinion, the representative or insurer was now precluded from doing so itself; and the third that the court itself could now determine the course of the injury to the bull.

The first step is not in issue here. The opinion communicated by the defendant by ex 14 on 14 October 1996, not being in accordance with the contract, is invalid and so to be disregarded. It is the ensuing two steps that, in my opinion, give rise to difficulties. Section 14(2) of the Insurance Contracts Act 1985 may afford a basis for taking the second of the three steps if the words “we are of opinion” can be considered a severable “provision” of the contract. In Butcher v Port, Sir Robin Cooke said it was well settled that a contracting party was disabled from setting up the absence of a stipulated approval if its non-fulfilment was due to his own default, citing New Zealand Shipping Co Ltd v Societe des Ateliers [1919] AC 1, 6. That principle has often been applied in Australia, but always in the context of a provision conferring on one party a power or option to determine an existing contract the performance of which was subject to a resolutive condition. In Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 440-442, and the many decisions that have followed it, New Zealand Shipping Co has not been regarded as capable of creating a new form of obligation that did not otherwise exist. That is the potential problem raised by the third of the steps in Butcher v Port.

For that, it is necessary to turn to the other decisions relied on in Butcher v Port. They are or include Hickman & Co v Roberts [1913] AC 229 and Panamena Europea Navigacion v Frederick Leyland & Co [1947] AC 428. The question common to the plaintiffs in both of those cases was the absence of a certificate of approval from a third party, which operated as a condition precedent to the plaintiff’s right to recover for work done. Because the defendant was responsible for the absence of the certificate, the plaintiff was held to be entitled to recover without it. Having studied those decisions in the light of the speeches of their Lordships in Beaufort Development (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266, the impression I have formed is that what they establish is that the absence, due to the defendant’s default, of the requisite certificate or opinion will not operate to prevent the plaintiff from suing and recovering; but only if, apart from that certificate or opinion, he has a recognised right or cause of action which is enforceable by proceedings in court. The right to payment for work done and materials supplied, as in the two cases referred to, is an example of that kind. The requirement of a certificate is not an element of the cause of action but simply an obstacle or condition precedent to its enforcement which, when removed, leaves the existing cause or right of action intact and enforceable. In that respect it seems to me to differ from the opinion required by para (b)(ii), which is an element in the plaintiff’s right to recover $80,000 as a debt due.

The question, then, is whether, given the absence of a favourable opinion of the defendant in the terms of cl (b)(ii), the plaintiff here has a right or cause of action to recover $80,000. I confess some difficulty in seeing that he has. Without such an opinion from the defendant, he had and has no right to the Agreed Benefits of $80,000. Saying that the defendant’s opinion of 12th October 1996 was vitiated by the way in which it was formed has the consequence that there is now no opinion at all. It does not conjure up the opinion that the plaintiff needs to establish his right of action to the sum claimed. Does he, independently of such an opinion, have an accrued right to the $80,000 that the court can enforce? I would, with respect, have thought he had not, unless one takes the further step of substituting for the words “we are of the opinion”; in para (b)(ii) the words “ a court is of opinion”; or perhaps of omitting those words altogether, so that the provision would then read:

“(ii) after that period of six (6) months … as a result of that injury or illness, the Insured Person is disabled or incapacitated to such an extent …”.

To take that step is not simply to eliminate a condition precedent relating to proof, but to make it a different contract with a different effect. Some Canadian courts have refused to take that step. See Re Massachusetts Benefit Life Association (Palframan’s Case) (1899) 30 OR 309, 317 and Copeland v Locomotive Engineers Insurance Association (1910) 16 OWR 739, 744, referred to in Teur v London Life Insurance Co [1936] 1 DLR 161, in which Diggle v Ogston Motor Co was relied on by the majority of the Manitoba Court of Appeal as a decision justifying their conclusion. Perhaps as a result of those decisions, there are now statutory conditions of insurance in Canada, which eliminate problems of this kind. See Brown & Menezes, Insurance Law in Canada §§ 11.3.1 – 11.3.4, at 214-215, including n 40 on p 213.

I am, however, conscious that the decision in Butcher v Port has been followed in Australia on so many occasions that it would be an act of temerity not to follow it here. Many of the decisions are cited in the reasons of Muir J on this appeal, which I have had the advantage of reading. Even though the plaintiff could have succeeded in recovering damages for the defendant’s breach of contract, he is entitled to recover the Agreed Benefits sum of $80,000 if he brings himself within the ratio of those decisions. It is at this point that the reason for the plaintiff’s reluctance to sue for damages becomes apparent. On the further hearing of the proceedings in the District Court, the learned judge found that he was not satisfied that the plaintiff was totally and permanently disabled within the meaning of para (b)(ii) of the definition. In arriving at that conclusion, his Honour took account of further evidence that was adduced at the trial before him. On appeal the plaintiff submitted that because that additional evidence was not before the defendant when it reached its decision on 14 October 1996, it was not admissible at the trial, at which the only question was whether the plaintiff was entitled to the Agreed Benefits sum of $80,000 when the defendant wrongly rejected his claim. That issue, it was said, had to be determined exclusively on the strength of the evidence or material that were before the defendant when it formed its invalid opinion.

I do not consider that the authorities relied on by the plaintiff support his submission to that effect. In particular, the Court in Butcher v Port itself seems plainly enough to have taken account of information gained from a post mortem examination of the prize bull conducted on 21 March 1973, which was some three years or more after the insurer had repudiated liability on 25 February 1970. It was in fact that information which proved decisive in Butcher v Port in demonstrating the error in the opinion of the veterinary representative on the strength of which the insurer had rejected the insured plaintiff’s claim, and also in justifying the Court’s conclusion that the plaintiff was entitled to recover the insurance moneys.

Two of the other decisions on which the plaintiff relies here are Heitman v Guardian Assurance Co Ltd (1992) 7 ANZ Insurance Cases 61-107 and Ivkovic v Australian Casualty & Life Limited (1994) 10 SR (WA) 325. Both involved provisions not materially different from the definition in para (b)(ii). Both were concerned with what may conveniently be described as the first stage of inquiry in cases of this kind; that is to say, whether the insurer’s opinion or decision has or has not been formed properly and in conformity with the contract. On that particular issue, one would expect the court’s decision to be confined to the material that was before the insurer or available to it at the time the opinion was formed. That is consistent with the view formed by Franklyn J in the first of those two cases, in which his Honour found that the opinion or decision of the insurer in that instance was not open to challenge. A different outcome ensued in Ivkovic v ACL, where Commissioner Roberts-Smith QC found that the insurer had mistaken the requirements of the opinion it was to form under the terms of the contract. In doing so, the Commissioner rejected further evidence that was aimed at establishing that the insurer was correct at the time it reached its opinion rejecting the claim, and found instead that the insurer, acting reasonably, ought to have accepted that the plaintiff was then totally and permanently disabled. That is not the position here.

Because the opinion of the defendant insurer in the present case was found to be invalid, the question whether the plaintiff was totally and permanently disabled fell, according to Butcher v Port, to be determined by the court. It is not altogether clear to me whether the date to which that determination is to be related is the date at which the defendant’s opinion was, or ought to have been, formed and communicated; or the time at which the matter is determined in court; or some other possible date, such as when the repudiation was accepted. Whatever it is, however, I agree with Muir J in thinking that the evidence adduced before the primary judge was admissible and properly admitted. Even if it is the first of those two dates, the effect of that evidence was, as the reasons of Muir J demonstrate, to show that at that date the plaintiff was not totally and permanently disabled within the meaning of the definition in para (b)(ii). This accords with the principle that the court does not speculate when it may know. It is quite true, said Scott LJ in Williamson v John I Thornycroft & Co [1940] 2 KB 658, 659:

“that the measure of damages has to be assessed as at that date, but courts in assessing damages are entitled to inform their minds of circumstances which have arisen since the cause of action accrued and throw light upon the reality of the case.”

The decision in that case was approved in Willis v The Commonwealth (1946) 73 CLR 105.

In my opinion, that is so whether the plaintiff sues for damages for breach of contract, or for the $80,000 as a debt due from the defendant. It seems to me that it would be wrong to limit what I have called the second stage of the inquiry to material that was before the insurer when it formed the impugned opinion. To do so would simply encourage insurers to make adverse decisions on material which was inadequate, in the knowledge that no further evidence could be adduced if their opinions were later invalidated. Such a result would not often be relished by an insured person in the position of the plaintiff in this case, and it does not seem to accord with what courts ordinarily do in determining an issue that comes before them. It was conceded by the plaintiff on this appeal that if the additional evidence was properly admitted at the hearing below, as I consider it was at that second stage of the inquiry, it was open to the learned trial judge to reach the conclusion that he did. I agree with Muir J that his Honour was correct in doing so. I also consider that he was correct in finding at the first stage of the inquiry that the material available to the defendant before 14 October 1996 when it made its decision was not such as to require the defendant, applying the appropriate criteria, to form the opinion that the plaintiff was totally and permanently disabled in terms of para (b)(ii) of the definition. To express it in another way, it was mistaken in the way it went about forming its opinion, but not, as it happens, in the conclusion it reached.

The appeal should be dismissed with costs.

MUIR J: The appellant insured, by a claim form dated 28 March 1995, made a claim on the grounds of total and permanent disablement on the respondent insurer under a policy of insurance entered into between them. The policy was one taken out by BHP Australia Coal Union on behalf of certain of its employees, including the appellant.

The claim was rejected by the respondent on the ground that it was not satisfied that the appellant was totally and permanently disabled within the meaning of that expression in the policy. In general terms, an insured under the policy was to be regarded as totally and permanently disabled only if the insured had not been able to work in his or her occupation for six months and if the insurer formed the opinion that the insured was likely never to work again. The learned primary judge held that, in forming the requisite opinion, the respondent had failed to apply the appropriate test and that, in consequence, there was no valid opinion. There was no appeal from that determination. At a subsequent and final hearing the primary judge found that, on the evidence available at time of hearing, the appellant was not totally and permanently disabled within the definition in the policy.

This appeal, which is from the latter decision, primarily concerns two questions. One is the Court’s role where, as a result of wrongful conduct on the part of the insurer, the opinion which is a condition precedent to the insurer’s obligation to pay is ineffective. The other, and related, question is whether it is permissible for the Court to have regard to evidence which came into existence after the date of the invalid determination by the insurer.

It is convenient to now set out the definition in the policy of “total and permanent disablement” -

“(a) suffering the loss of the use of two limbs or the sight of both eyes, or the loss of the use of one limb and the sight of one eye (where limb is defined as the whole hand or the whole foot), or

in the case of an Insured Person who is engaged in a gainful occupation, business, profession or employment-

the Insured Person is totally unable to and does not in fact engage in that gainful occupation, business, profession or employment, as a result of an injury or illness for a consecutive period of six (6) months, and

after that period of six (6) months, we are of the opinion that, as a result of that injury or illness, the Insured Person is disabled or incapacitated to such an extent as to render the Insured Person likely never to be engaged in any gainful occupation, business, profession nor employment, for which the Insured person is reasonably suited by training, experience or qualification.”

The history of the claim

After receipt of the claim, the respondent sought information from the appellant’s treating doctor, Dr Kemp, who, in a letter of 4 July 1995 to the respondent, advised –

“I think he fits the definition of an insured person, previously engaged in a gainful occupation, who has been totally unable to engage in that occupation for a period of more than six months. I personally doubt that he is likely, on the basis of our past experience with him, to respond to retraining or relocation. I therefore considered him to be permanently and totally disabled within the terms of the definition provided. Please let me know if further information is required.”

Enclosed with the letter of 4 July was a copy of a discharge summary concerning treatment given the appellant at the Royal Brisbane Hospital in October 1992. That document discloses that the appellant was admitted to the Hospital after having been advised to obtain an invalid pension on the basis of possible multiple sclerosis or chronic fatigue syndrome. It further appears from the summary that tests and examinations of the appellant disclosed no evidence of “organic neurological disease to account for the (appellant’s) symptoms” and that “it was considered that quite possibly his symptoms were of a psychological basis”.

The summary then records –

“The patient was subsequently seen by Dr Lawrence, Psychiatrist, who considered that he had main personality traits of dependence, entitlement, narcissism contributing to his disability, plus an exploitation of current controversy over Chronic Fatigue Syndrome to entitle him to a variety of benefits psychological, social and financial. She did not consider that he was as disabled as he claimed and that his story at times was contradictory. She considered he had poor frustration tolerance and low motivation for work and thought that this was a major contribution to his disability.”

The respondent also sought information from the appellant’s general practitioner, Dr Holford who, in addressing the definition in the policy of totally and permanent disability, stated in a letter to the respondent dated 11 July 1995 –

“While I believe that Mr Mc Arthur’s illness fits the part i of (b) of your definition of totally and permanently disabled, part ii is more difficult to answer. I am uncertain if he will ever be able to return to gainful employment but cannot say that he may not.”

Dr Kemp had written to Dr Holford, a general practitioner treating the appellant, on 30 December 1994, observing, inter alia –

“I have said to him that I do not feel it will be possible for him to continue in his current employment and probably not in the industry. He requires only part time employment at the most, which is associated with flexible hours, which means that he is not required to be there regularly, and which requires no sustained effort for days at a time. Such employment is not easily forthcoming. …

In summary then I feel that Jeffrey is not likely to be able to continue in his present employment or in the industry. If he is able to work at all, it will require part time activity and a flexibility which few employers would be able to incorporate into their work.”

A copy of that document was in the possession of the appellant prior to 14 October 1996 as was a document entitled “Attending Physician’s Statement” signed by Dr Holford. That document contained a diagnosis of chronic fatigue syndrome and expressed the opinion that it was uncertain that the appellant would return to work.

The respondent also had in its possession “a disability claim medical report” dated 19 January 1995 signed by Dr Holford who described the appellant’s “current disability” as “chronic fatigue”. His answer to the question “What type of work do you believe your patient may currently be capable of?” was “very little – fatigue makes even part time work unlikely”. He responded “Uncertain if any” to the question “What type of work do you believe he … will be capable of in the future?”

The respondent’s chief medical officer made the following notation on the respondent’s file in respect of the appellant’s claim on 18 July 1995 –

“Disability has certainly been substantiated but permanency is very much in question. Review 12/12

On 19 July 1995 the respondent gave the appellant written notice of its decision to defer a decision on the claim for 12 months.

The respondent received a letter from Dr Kemp of 7 September 1995 responding to a letter of enquiry from the respondent of 1 June 1995 requesting a detailed medical report. Dr Kemp’s letter was relevantly identical to his letter to the respondent of 4 July 1995.

Some time after 10 July 1996 the appellant’s solicitors provided the respondent with a report to the appellant’s solicitors of that date by Dr Mulholland, a psychiatrist, who had examined the applicant “in order to advise regarding future disability”. In his report he noted “He is not trying to get back to work at the present time”, and expressed these opinions –

“The diagnosis of Chronic Fatigue Syndrome (CFS) is a controversial one and the medical practitioner must try to investigate and/or eliminate the following conditions:- …

For my part I must point out that the issue remains controversial in any one patient and especially in relation to further working ability the issue is one of how that patient experiences themselves and how they conceptualise their future working ability. This man now has had significant symptoms since 1988 and his condition is continuing unabated with no signs of getting better and generally getting worse if anything.

I would suggest that it is unlikely that he is going to get back to work within the next two to five years. It is difficult to make predictions beyond that time except to make the general prediction that the longer people are off work the more likely they are to stay off work even if the original reason for their going off work has now resolved. In the long run I suspect that it is more likely than not that he is not really going to get back into the work force.

I would like to suggest that psychiatric or psychological treatment would be useful with this man, however I do not think that any amount of psychiatric or psychological treatment will be of any use unless or until in the unlikely event that he was willing to completely give up on looking for organic, physical or general medical causes for his condition and to accept that it is a psychological condition. If a person is willing to take that gigantic step, then it is possible that they may be effectively treated. However I consider that course of action to be quite unlikely in respect of this unfortunate man.”

The respondent wrote to Dr Mulholland seeking further information. Dr Mulholland replied in a letter dated 27 September 1996 advising that in his opinion the appellant had a psychological problem but that “… the precise diagnosis … is bedevilled with difficulty”.

Referring to the definition of permanent and total disability he said –

“I note your definition of permanent and totally disabled. I must say that the word ‘never’ is a difficult one to get around in a man who is only thirty-eight years of age. Frankly I think it unlikely that he is going to get back into the workforce in the foreseeable future, meaning about five years. I note his previous occupations have mostly been of a physical variety and unless something unexpected happens I think that it is likely that he will not be engaged in any gainful work again.

You will appreciate that it is difficult for me to say ‘never’ because that involves making predictions of over twenty years duration which I feel reluctant to do.”

The officer examining the claim on behalf of the respondent noted on the file on 10 October 1996 –

“We have several reports from specialists, and have indicated client is permanently and totally disabled. We have also written back to psychiatrist posing questions on validity. All confirmed client has a disorder of a psychological nature, therefore admit claim.”

The chief medical officer disagreed. He noted the file as follows -

I note the detailed report from Dr Mulholland. I would nonetheless recommend that the status of TPD NOT be accepted. I interpret Dr Mulholland’s view as being inconclusive to the extent that his views are those of the possibility/probability outcome at this stage.”

The respondent, in a letter dated 14 October 1996, rejected the claim stating –

“We have noted that there seems to be a reluctance in classifying this disablement as ‘permanent’ and therefore we are not prepared to admit this claim. As chronic fatigue syndrome is a fairly recently diagnosed illness, there is not a lot of evidence to say that the incapacity could be long term. Whilst appreciating that Mr McArthur may currently be disabled, we have not seen sufficient evidence to satisfy us that he would be totally disabled for the balance of his working life.

If such evidence were to become available, we would review this decision.”

The proceedings in the District Court

It does not appear that, after the rejection of his claim, the appellant attempted to put further evidence before the respondent. He commenced proceedings in the District Court on 29 May 1997, claiming $80,000 “being a lump sum payable pursuant to” the policy or, alternatively, $120,000 damages for breach of contract.

In its defence, the respondent denied that any benefit was payable under the policy and asserted that it had not made a final determination on the appellant’s claim. The defence was amended on 18 May 1998 to allege that the respondent made a final decision on the claim and communicated it by letter dated 4 March 1998. That contention had also been advanced in earlier correspondence.

The commencement of proceedings by the appellant sparked a flurry of activity on the part of the respondent. It arranged for the appellant to see a psychiatrist, Dr Nothling and a physician, Dr Douglas. In a letter to the appellant’s solicitors dated 26 June 1997 the respondent’s solicitors asserted that the respondent had not yet made a final determination on the appellant’s claim. The appellant was also invited to “submit any further medical or other evidence in support of his claim …”.

When the matter came on for hearing it became apparent that the appellant proposed to make out a case which had not been pleaded, namely that the respondent’s opinion communicated in its letter of 14 October was invalid.

Counsel for the respondent objected and under the guise of supplying particulars of allegations in the statement of claim, the appellant’s counsel informed the Court that the appellant would allege that –

“… the determination made by the defendant on 14 October 1996 were (sic) wrongful as it was unreasonable on the grounds that, (i), the determination … to not admit the claim was made against the weight of the evidence then before the defendant; (ii), that the defendant misapplied the required test under the policy by ascribing a higher standard than the proper construction of the word “likely” demands”.

The appellant’s counsel then tendered 14 documents and announced that he had closed his case. The respondent’s counsel tendered further documents and sought to tender a video recording of the appellant with a view to providing evidence of his physical capacities. The tender was objected to on the grounds that any material not before the respondent at the time of its determination was irrelevant. The primary judge, after hearing argument, decided to reserve the matter and to determine as a discrete point the question of whether the respondent’s decision was a reasonable one. He intimated that if that point was decided against the respondent, he would rule on the admissibility of the video recording and give further consideration to what further evidence could be adduced.

The primary judge gave reasons on 9 December 1998 in which he concluded that the claim had been rejected by the respondent’s letter of 14 October 1996.

He answered affirmatively the question “did the insurer act in breach of the obligation to act reasonably, fairly and in good faith towards the plaintiff when considering whether it should form the opinion required by the definition of disabled?” which he posed to himself. In stating his conclusions in this regard, his Honour said, “On balance the conclusion I have reached is that the plaintiff has not demonstrated the insurer’s decision was unreasonable on the whole of the material then before it”. He found, however, that the opinion had not been formed properly because the respondent had applied an erroneous test. His Honour found that the correct test was on the balance of probabilities but did not identify the test which, in his view, the respondent had used. It followed from this finding, according to his Honour, that the respondent was in breach of a duty to act reasonably, fairly and in good faith when considering the claim and thus could not rely on its decision communicated in the letter of 14 October 1996. His Honour concluded that it was appropriate in the circumstances that the Court determine whether the appellant was totally and permanently disabled within the meaning of the policy.

When the matter came back before the primary judge, neither party called further evidence. His Honour then proceeded to determine whether the appellant met the criteria for total and permanent disability, disregarding the requirement for the formation of an opinion by the respondent, but taking into account all relevant evidence available at the time of trial.

His Honour then found that “a reasonable insurer may have declined to form the TPD opinion on the material in the insurer’s possession on … 14 October 1996”. He further found that a reasonable insurer would have formed “the TPD opinion” after receipt of Dr Mulholland’s letter of 27 September 1996 if “a further deferment of the claim was not reasonably open to the insurer”, but that it was open to an insurer, acting reasonably, to defer a decision in the light of the new information contained in Dr Mulholland’s report of 10 July 1996 [he refers to a letter of 27 September 1996]. After referring to the written opinions of Dr Douglas and Dr Nothling, which expressed opinions adverse to the appellant, he found on the basis of all the material before him that he was not satisfied that “the plaintiff is TPD”.

I do not understand why, having regard to his conclusions about the Court’s function, his Honour gave consideration to what a reasonable insurer in the position of the respondent may or may not have done. In the end result, however, he made a determination of whether the appellant was totally and permanently disabled within the meaning of the subject clause taking into account all evidence available at the time of trial.

The appeal

Neither party appealed from the earlier adjudication and it is therefore unnecessary to express any views on it. It follows that it was common ground on the appeal that the respondent’s opinion communicated in its letter of 14 October 1996 had miscarried. There was also no issue about the correctness of the primary judge’s finding that in arriving at its opinion the respondent was obliged to act reasonably. There is ample authority for that conclusion.¹

Mr North, who led Mr Rolls for the appellant, submitted that the issue for determination by the primary judge was what a reasonable insurer acting in the respondent’s position would have done on the material then before the respondent. Mr Morton, who appeared for the respondent, argued that the approach taken by the primary judge on the second hearing was correct.

Mr North relied on authorities establishing that evidence coming into existence after the time at which the relevant opinion is formed is irrelevant to the determination of whether the opinion was duly formed² as supporting the appellant’s proposition that such evidence was also irrelevant to any determination to be made by the Court after a finding that no valid opinion had been formed. Mr Morton submitted that the Court could have regard to all evidence coming into existence prior to the conclusion of the trial. The evidence to which regard may be had by the Court in the circumstances under consideration depends on the function or role being performed and it is to that matter I now turn.

Where a party to a contract is in breach of a contractual obligation, the innocent party’s remedy, absent the availability of specific performance, and putting aside the question of whether the breach is such as to give the innocent party a right to terminate, is to sue for damages for breach of contract. In this case, the insurer having been in breach of a contractual obligation, an orthodox contractual analysis would suggest that the appellant’s remedy was to sue for damages for breach of contract. That is what the appellant did, at least in the alternative. I note that no issue arose on the appeal concerning the appellant’s status as a contracting party or about his standing to sue.

Another possibility is that the innocent party may have a claim in debt if the amount claimed is ascertained and is payable under the terms of the contract. A difficulty with regarding the appellant’s claim as a claim for a debt is that the formation of the respondent’s opinion is a precondition of the right to payment under the policy. Until the respondent’s opinion has been found to have miscarried and until findings are made as to total and permanent disability, no sum can be due to the appellant.³

Damages for breach of contract are awarded with the object of placing the plaintiff in the position in which he would have been had the contract been performed.⁴ If the contract had been performed in this case, the respondent would have formed the subject opinion honestly, bona fide and reasonably. Continuing this analysis, if an insurer acting reasonably would have rejected the claim, the appellant would be unable to demonstrate loss. On the other hand, if it is concluded that an insurer acting reasonably would have accepted the claim, the appellant would be entitled to the payment of the sum stipulated by the policy to be payable in the event of total and permanent disability. There are, however, possible complicating factors. In some circumstances, it may be that an insurer acting reasonably may deem it advisable to seek further evidence or even to postpone a determination pending the resolution of various matters.

Where a response of such a nature by the insurer is possible, the damages recoverable may need to be quantified by reference to principles relating to loss of a chance.

In a number of comparatively recent decisions concerning the failure by the insurer to properly form an opinion which is a pre-condition to the insurer’s obligation to make payment under the policy, however, courts have determined disability as a question of fact and have proceeded to order payment of the sum payable under the policy in the event of disability.

In Edwards v The Hunter Valley Co-op Dairy Co Ltd⁵ McLelland J, in reliance on Butcher v Port,⁶ held that, as the relevant opinion such as that under consideration is of the nature of a condition of the insurer’s liability under the policy, the insurer cannot rely on non-fulfilment of the condition if fulfilment was prevented by its own default. In such circumstances, he concluded, the issue upon which the insurer’s opinion was required to be formed would become one for determination by the Court. That was the view reached separately by each member of the Court of Appeal in Butcher v Port.

In that case, Cooke J expressed the principle as follows–⁷

“For present purposes a clause such as this is not materially distinguishable from one making the certificate of a party’s engineer or other appointee a condition precedent to action. The principle that a party cannot insist on a condition if non-fulfilment is his own fault is basic in contract law: see for instance New Zealand Shipping Co. Ltd. v. Société des Ateliers (1919) A.C. 1, 6, per Lord Finlay L.C.

In relation to certificate clauses and the like the principle has the effect of, first, disabling the party from setting up the absence of the stipulated approval and, secondly, leaving the issue to the determination of the Court. In England there is the highest authority for this in the decisions of the House of Lords in Hickman & Co. v. Roberts (1913) A.C. 229 and Panamena Europea Navigacion (Compania Limitada) v. Frederick Leyland & Co. Ltd. (1947) A.C. 428. For an application specifically to insurance contracts, see the judgment of Amphlett B. in Edwards v. Aberayron Mutual Ship Insurance Society (1876) 1 Q.B.D. 563 at pp. 580-581. In my view there is every reason for adopting the same approach in New Zealand. Clauses ousting the jurisdiction of the Courts should not be given any wider effect here.”

Summers J observed relevantly,⁸ that where the insurer’s opinion is not reasonable–

“…will be a matter of establishing liability on the balance of probability. And the Court the agreed mode of proof not having been met the policy is not frustrated – it will be the forum.”

The remaining member of the Court, Eichelbaum J said –⁹

“Where non-fulfilment of a condition precedent is a party’s own fault he is prevented from asserting the other party’s failure to comply; per McCarthy J. in Scott v. Rania (1966) N.Z.L.R. 527 at p. 534. The cases cited by Cooke J show that the matter in issue – here, whether the stated incapacity arose in the manner and within the periods specified – then becomes one for the Court and the findings of the Judge, which I would uphold, determine that issue in favour of the plaintiff.”

Hickman & Co v Roberts,¹⁰ to which Cooke J referred, concerned a building contract under which payments to the builder were to be made on the certificate of the architect. The architect, having taken an erroneous view of his role, failed to issue a certificate. It was held that the proprietor was precluded from setting up as a defence to the action either that the issue of the certificate was a condition precedent to the bringing of the action or that the certificate was conclusive as to the amount of the claim. In the Court of Appeal it was ordered that the question of the amount due to the builder should be settled by an official referee. That course of action was approved on appeal to the House of Lords.

In Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd,¹¹ a contract for the repair of a vessel provided that the ship owners would pay for the repairs upon “the ordinary commercial basis” after the issue of a certificate by the owner’s surveyor that the work had been satisfactorily carried out. In breach of the shipowner’s duty no certificate was issued. The contractor sued for a sum on account of work done to the vessel. It was held that, as the certificate was not issued through the default of the owner’s surveyor, the contractor was absolved from the necessity of obtaining it and the contractor was entitled to recover the amount claimed in the action. This conclusion was arrived at by application of the principle which prevents a person from taking advantage of the non-fulfilment of a condition the performance of which has been hindered by himself and the related principle which “exonerates one of two contracting parties from the performance of a contract when the performance of it is prevented and rendered impossible by the wrongful act of the other contracting party”.¹²

Hickman & Co v Roberts and Panamena Europea Navigacion (Compania Limitada) v Frederick Leyland & Co Ltd offer support for the approach of the Court in Butcher v Port, as does Edwards v Aberayron Mutual Ship Insurance Society¹³, another of the cases cited in Cooke J’s reasons. In that case, the plaintiff mortgagee of a ship insured with the defendant claimed under the policy of insurance for loss of the ship. The policy made it a condition precedent to the bringing of an action that the loss claimed by the insured should have been first decided upon by the directors of the defendant. The directors, without hearing from or giving the plaintiff the opportunity to be heard, resolved that the ship was not found to be lost by perils of the sea (the contingency relevantly insured against) and that the owners had no claim on the Society. Amphlett B concluded that the directors’ determination had miscarried. He addressed the consequence of that conclusion –¹⁴

“But it is said that the determination of the directors having been made a condition precedent to bringing an action, a Court, at law at least, cannot interfere, as that would be making a new contract for the parties. I think there is a fallacy in this argument. Courts of Equity have no more power to make new contracts for parties than Courts of Law, and yet they would undoubtedly interfere when a contract is performed on one such and the mode agreed upon for ascertaining the amount to be paid by the other has failed in any way without the plaintiff’s fault. Put the simple case, which is in principle the same as that we are considering: A. contracts to do work for B., the price to be determined by the engineer of B. The work is done, and before the price is determined the engineer, by some act of his own not necessarily fraudulent, becomes incapacitated to act as arbitrator. I cannot persuade myself that Courts of Law are powerless to prevent the gross injustice of B. having the benefit of the work, without compensation to A., except by the inconvenient and often ineffectual course of bringing an action for neglect of duty against the engineer and his employer. To give direct redress in such a case seems to me only another application of the well-known principle, that a man shall not take advantage of his own wrong, under which even precedent conditions, in their strictest sense, have been held to be discharged where performance was prevented by the defendant himself: see Comyns’ Digest, Condition (L.6.); and the case of Hotham v. East India Company 1 T.R. 638. … here … I can see no reason why a Court of Law should not determine the matter themselves.

For these reasons I think that the plaintiff can sustain his action; and there is no difficulty about the amount, as it is found in the case (paragraph 14) that the defendants now admit, contrary to what their directors had determined, a total loss of the vessel by perils of the sea.”

Kelly CB and Brett J, the other members of the majority, arrived at the same result by a quite different route, concluding that the relevant provisions were intended to prevent the insured from maintaining any action in the courts in respect of a dispute arising on the policy and were thus invalid as contrary to public policy.

In Chammas v Harwood Nominees Pty Ltd,¹⁵ Hodgson J followed the course taken by McLelland J in Edwards v The Hunter Valley Co-op Dairy Co Ltd and, after concluding that the insurer had lost the benefit of the relevant condition, proceeded to determine the question of disablement.

In Wyllie v National Mutual Life Association of Australasia Ltd,¹⁶ Hunter J, after referring to Edwards and Chammas, observed –

“In any event, I consider that the insurer has precluded itself by its breach from relying upon the condition precedent of its opinion as to the plaintiff’s disability. With that condition precedent removed, it is simply a question of determining the disability or assessing damages for breach, a possible difference in approach which has no practical distinction in this case, in my opinion.”

On the basis of an admission by the defendant insurer that the plaintiff’s entitlement in the event of total and permanent disability was a particular sum, his Honour ordered that there should be judgment for the plaintiff in that sum.

There is thus a substantial body of authority in support of the conclusion that where, as in this case, payment is dependent on the formation by a party to a contract of an opinion as to the existence of a state of affairs and the opinion is not duly formed through the fault of that party, the Court may proceed to decide, as a question of fact, whether such state of affairs exists. Having made a determination in favour of the insured the court may then order payment of the sum which, would have been payable had the insurer’s opinion been duly formed in favour of the insured. That is the course the primary judge took in this case and, not without some misgivings, I accept that it was correct. Some further support for this approach is to be found also in the reasons of the members of the House of Lords in Beaufort Developments (N I) Ltd v Gilbert-Ash N I Ltd.¹⁷

As the Court’s role is to determine whether the definition of total and permanent disablement has been fulfilled, disregarding the requirement for the formation of an opinion by the respondent, there is no reason why the Court performing that task, should be confined to the evidence before the respondent on 14 October 1996. It may be that the determination needs to be made as at the date on which the breach of contract occurred and the cause of action arose but on the facts of this case, it is not likely to matter a great deal whether the relevant time is taken to be the time of trial or 14 October 1996.

Medical reports coming into existence after the relevant time will be admissible provided that they are pertinent to the determination of the appellant’s condition at the relevant time.¹⁸

Dr Douglas, physician, saw the appellant on 8 October 1997. He subsequently produced a six page report for the respondent concluding –

“In summary, I could not find any evidence to suggest that he had significant underlying organic pathology. His only health problem appears to be his obesity. I do not believe that he meets the criteria for being declared totally and permanently disabled as defined in your correspondence.”

Dr Douglas, in another report to the respondent dated 30 December 1997 affirmed the opinion expressed in his 21 October 1997 report. In that letter he concluded –

“As I mentioned in my correspondence, I do not believe that he meets the criteria of being totally and permanently disabled. It is notable that he does admit to doing certain amounts of maintenance work, with respect to the school grounds and his own property.

I note, however, that he did state to me that he expects to stay on the Disability Pension for the remainder of his life and his general expectation was that he would never return to the work force. Whilst he holds these views, it seems unlikely that he will ever return to the work force. I suspect, however, that the limiting factor, which precludes him from returning to the work force, is his attitude to the work force and his view that remaining on the Disability Pension for the remainder of his life, is an appropriate course of action for him.

On the evidence that he provided, when I saw him on 8.10.97, I formed the view that he was capable of working and I could find no obvious reason why he should not be capable of engaging in suitable gainful employment at this time.”

Dr Nothling, psychiatrist, examined the appellant on 8 October 1997. In his report of 17 November 1997 he expressed the following opinions –

“In my opinion, the most probable psychiatric diagnosis for him is that of a Personality Disorder. In my opinion he has personality traits of dependence. Such personality traits would not prevent him from working. I have difficulty in accepting the genuineness of his claimed symptomatology of chronic fatigue and muscular pain. …

From a psychiatric perspective, he does not, in my opinion, meet the Mercantile Mutual definition of total and permanent disablement. Observation of him in a non-medical setting when he is not aware of being observed, may be of some assistance in further defining his activity levels.”

Those opinions express views as to the condition of the appellant at the time of the opinion and, necessarily, predict the likelihood of the appellant engaging in gainful employment for which he is reasonably suited by training experience or qualification in the future. The opinions though are relevant to the question of whether, as at some earlier date, the appellant is likely never to be engaged in such employment. There is no evidence of any fact or circumstance intervening between any relevant earlier time and the date of the opinions which would deprive them of probative value in respect of the appellant’s condition at that earlier time.

In the light of the recent opinions by Drs Douglas and Nothling, it was open to the primary judge not to be satisfied that the appellant did not come within the definition of total and permanent disability. None of the medical practitioners whose reports were before the primary judge were cross-examined and the appellant himself did not give evidence. In those circumstances, it would have been surprising if the primary judge had rejected the later medical opinions in favour of the earlier in order to make a finding of total and permanent disability.

The discussion in paragraphs [30] to [42] hereof shows that the evidence before the respondent on 14 October 1996 by no means uniformly favoured a determination of total permanent disability. Even Dr Mulholland’s later reports expressed guarded and equivocal opinions on the critical question of whether the appellant was “never likely to be engaged in any gainful occupation …”. Indeed, in his first set of reasons, the primary judge concluded that, putting aside the application of the wrong test, the appellant had not demonstrated that the respondent’s decision to reject the claim was unreasonable.

It is my view that an insurer in the position of the respondent, acting reasonably and on the information then available, even if it were necessary to have regard to what a reasonable insurer would have done on 14 October 1996, would not have admitted the claim. Such an insurer would be entitled to have regard to: the nature of the “illness”, as the respondent did; the scepticism expressed in the hospital report of October 1992; and to the reluctance on the part of Drs Holford and Mulholland to commit to an opinion that the appellant was “likely never to be engaged in any gainful occupation … for which (he) is reasonably suited by training experience or qualification”.

Mr Morton, who appeared for the respondent, further argued that the appellant’s failure to give evidence was fatal to his case for two reasons. The first was that the Court, having regard to such failure, should draw the inference that his evidence would not have assisted his case.¹⁹ The other argument was that because the appellant failed to give evidence, the facts upon which the medical reports tendered on his behalf were founded were unproven. Reliance was placed on Ramsay v Watson²⁰ for the proposition that the medical reports or opinions were not evidence of the facts recited in them upon which the opinions were based.

In view of the conclusion I have reached, it is unnecessary to pursue these points.

On 9 December 1998, when the issue of the validity of the respondent’s opinion was determined against the respondent, the primary judge ordered that the respondent pay the appellant’s costs of and incidental to the hearing on 22 May 1998, together with the costs of the hearing on 9 December to be taxed. When the matter was mentioned on 18 December 1998, the respondent made application to have the costs order vacated on the grounds that the order was premature because the appellant had not established a claim to any relief sought by him in the action. That application was adjourned and the primary judge dealt with it in reasons delivered on 12 July 2000. On that date he ordered that the appellant pay the respondent’s costs to be assessed on the standard basis incurred after 9 December 1998 but declined to vacate or vary his earlier costs order.

I have considerable sympathy with the submission that it would have been appropriate for the question of costs to be deferred until the determination of the success or failure of the appellant’s claims on conclusion of the trial and there is also the consideration that the splitting of the trial resulted, at least in part, from the late emergence of the real issue to be litigated by the appellant. I am not persuaded though that the order made was outside the permissible discretion of the primary judge. After all, in the end result, there was no opposition to the determination of the opinion matter as a preliminary point and the respondent lost on it.

I would order that the appeal be dismissed with costs.

Footnotes

1. Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Insurance Cases 61-113 and the authorities referred to at 77,536. See also Wyllie v National Mutual Life Association of Australasia Ltd, unreported, NSW Supreme Court, 50094/96, 18 April 1997 and Beverley v Tyndall Life Insurance Co Ltd (1999) 10 ANZ Insurance Cases 61-453. ↩

2. Tonkin v Western Mining Corporation Ltd (1998) 10 ANZ Insurance Cases 61-397 and Heitman v Guardian Assurance Co Ltd (1992) 7 ANZ Insurance Cases 61-107. ↩

3. Cf In re Collbran [1956] 1 Ch 250 at 255 and F & K Jabbour v Custodian of Israeli Absentee Property [1954] 1 WLR 139 at 144-145. ↩

4. Gates v The City Mutual Life Assurance Society Limited (1985-1986) 160 CLR 1 at 11-12. ↩

5. (1992) 7 ANZ Insurance Cases 61-113. ↩

6. (1985) 3 ANZ Insurance Cases 60-638. ↩

7. At 78,927- 78,928. ↩

8. At 78,929. ↩

9. At 78,934. ↩

10. [1913] AC 229. ↩

11. [1947] AC 428. ↩