MMI GENERAL INSURANCE LIMITED v BAKTOO & ANOR [2000] NSWCA 70 | Case summary

MMI GENERAL INSURANCE LIMITED v BAKTOO & ANOR [2000] NSWCA 70 | Case summary | Zoe

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MMI GENERAL INSURANCE LIMITED v BAKTOO The appellant was the insurer of premises upon which the respondent husband and wife, in partnership, conducted a restaurant. When the premises were damaged by fire, the respondents sued the appellant for damages for the appellant's refusal to pay their claim under the insurance policy. The policy contained the following condition: "If any claim is in any respect fraudulent or if any fraudulent means or devices are used by you or anyone acting on your behalf to obtain any benefit under this Policy, or if any loss, damage or destruction is occasioned by your wilful act or with your connivance your claim will be rejected." The appellant relied upon this condition and s56(1) of the Insurance Contracts Act 1984 (Cth) and argued that it was entitled to reject the claim as the respondents had deliberately lit the fire and fraudulently lodged a claim to obtain benefit under the policy. The trial Judge found that the interests of the husband and wife in relation to the insured property were inseparably connected as partnership assets. His Honour found that the husband had deliberately lit the fire and could not therefore benefit under the policy. However, since his Honour found that the wife had played no part in the fire and was not privy to the fraud, he held that, as an innocent party, she was entitled to indemnity in respect of her proportion of the loss. The appellant's appeal concerned the question of its liability to the wife in these circumstances. Held: (by Sheller JA, Mason P and Beazley JA agreeing) Whether parties jointly or severally insured

Where a promise is made to several persons, it is construed according to the interests of such persons. If their interests are joint, the promise is construed as joint. If their interests are several, it is construed as several. Lombard Australia Limited v NRMA Insurance Limited (1968) 72 SR (NSW) 45, applied.
The interests in partnership property belong to members of the partnership and a partner has an interest in every asset of the partnership. Where the interests insured are partnership interests in property, the interests of the insured are inseparably connected and are to be treated as one; consequently, the insurance is a joint insurance. In these circumstances, the nature of the insurer's obligation is to indemnify the parties insured jointly and the insurance moneys are recoverable as an indemnity for the loss of partnership property. Canny Gabriel Castle Jackson Advertising Pty Limited v Volume Sales (Finance) Pty Limited (1974) 131 CLR 321, applied; Commonwealth Construction Co Limited v Imperial Oil Limited (1976) 69 DLR (3d) 558, applied; Advance (NSW) Insurance Agencies Pty Limited v Matthews (1989) 166 CLR 606, applied; Advance (NSW) Insurance Agencies Pty Limited v Matthews (1988) 12 NSWLR 250, dissenting judgment of Samuels JA applied; General Accident Fire and Life Assurance Corporation Limited v Midland Bank Limited [1940] 2 KB 388, applied; Kelly v The National Insurance Company of New Zealand Limited (1995) 8 ANZ Ins Cas 61-239, referred to. Whether insurer liable to innocent joint co-insured
Where an insurance policy covers the joint interest in property of two insured parties and one of the insured parties, without the connivance or knowledge of the other, fraudulently attempts to obtain a benefit under the policy by deliberately setting fire to the property, the insurer is entitled to reject a claim made by the other insured party (the innocent joint assured) to be indemnified for the resultant damage. Higgins v Orion Insurance Co Limited (1985) 17 DLR (4th) 90, distinguished; Holmes v GRE Insurance Limited (1989) 5 ANZ Ins Cas 60-894, distinguished.
Where the interests of the insured parties are inseparably connected to the insured property, the fraudulent act of one co-insured will prevent a successful claim by the innocent co-insured. This is because to allow a successful claim would allow a fraudulent party to profit from the fraud and defeat the purpose of the principle which denies recovery for a fraudulent claim. P Samuel and Company Limited v Dumas [1924] AC 431, distinguished; Advance (NSW) Insurance Agencies Pty Limited v Matthews (1988) 12 NSWLR 250, dissenting judgment of Samuels JA applied. ORDERS 1. Appeal allowed; 2. Set aside the verdict and judgment for the respondent, Karen Baktoo of 30 July 1998; 3. Order that judgment be entered in favour of the appellant, MMI General Insurance Limited against the respondent Karen Baktoo; 4. Order that Karen Baktoo pay the costs of the MMI General Insurance Limited of the proceedings in the District Court and of this appeal but have a certificate under the Suitors Fund Act 1951, if so qualified

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SHELLER JA: INTRODUCTION 2 Ibrahim and Karen Baktoo (Mr and Mrs Baktoo) conducted in partnership an Indian restaurant called Raja's and a retail shop selling Indian curios on a property at 142 Princes Highway, Ulladulla, which they had jointly purchased in 1992. Separate from the business premises was a small residence Mr and Mrs Baktoo occupied with their children as a home. They obtained insurance cover under a policy described as "Manufacturers' Combined Insurance" from MMI General Insurance Limited (MMI). The policy was from time to time renewed and was in force on 12 September 1995 when the business premises were badly damaged by fire. Mr and Mrs Baktoo sued MMI in the District Court to recover damages for MMI's refusal to pay their claim under the policy. MMI filed a defence alleging that it was entitled to reject the claim because Mr and Mrs Baktoo had deliberately lit the fire which damaged the building and contents and had fraudulently lodged the claim to obtain a benefit under the policy knowing that the loss or damage was occasioned to the premises and its contents with their knowledge and connivance. MMI relied upon a condition of the policy and s56(1) of the Insurance Contracts Act 1984 (Cth) (the Act). 3 The trial Judge, Patten DCJ, found that Mr Baktoo had deliberately lit the fire which damaged the premises but that Mrs Baktoo had played no part in the lighting of the fire and was not privy to the fraud. His Honour held that Mr Baktoo, having deliberately lit the fire, could not benefit under the policy but that Mrs Baktoo, as an innocent party, was entitled "to indemnity in respect of her proportion of the loss". His Honour entered a verdict and judgment for Mrs Baktoo in the sum of $69,992. This amount was one-half of what otherwise would have been MMI's liability under the policy as a result of the fire. 4 MMI has, by leave of the Court, appealed from this decision. The appeal is limited to liability. MMI does not dispute the assessment of damages if it is liable. The appeal raises what, in New South Wales at least, seems to be an untested point. When a policy, inter alia, of fire insurance covers the joint interest in property of two insured parties and one of the insured parties, without the connivance or knowledge of the other, fraudulently attempts to obtain a benefit under the policy by deliberately setting fire to the property insured, can the insurer reject a claim made by the other insured party to be indemnified for the resultant damage?

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However, his Honour said that although ss54 and 56 of the Act dealt with circumstances in which an insurer might refuse to pay claims and an insurer's rights in respect of fraudulent claims, neither expressly addressed the situation of an innocent insured in circumstances such as the present. 9 In dealing with Mrs Baktoo's independent claim, the Judge said that, so far as emerged from the evidence, the interests of Mr and Mrs Baktoo in relation to the insured property were inseparably connected as partnership assets. The traditional view had been "that in situations where multiple or joint insured are inseparably connected to the insured property, the wilful act of a co-insured will prevent a successful claim by his innocent co-assureds". Reference was made to P Samuel and Company Limited v Dumas [1924] AC 431, a case about the right of the mortgagee of a ship to recover from the insurer where the ship had been scuttled by the master and crew with the connivance of the owner. At 445-446 Viscount Cave said: "It may well be that, when two persons are jointly insured and their interests are inseparably connected so that a loss or gain necessarily affects them both, the misconduct of one is sufficient to contaminate the whole insurance: Phillips on Marine Insurance, vol i, para 235. But in this case there is no difficulty in separating the interest of the mortgagee from that of the owner; and if the mortgagee should recover on the policy, the owner will not be advantaged, as the insurers will be subrogated as against him to the rights of the mortgagee." 10 A significant feature of the contrast between an interest inseparably connected with another and the interest of the mortgagee, which could be separated without difficulty from the interest of the owner, was that the mortgagee, for reasons his Lordship gave, could recover without the owner being advantaged. At 469, Lord Sumner said: "Forbidding him to take advantage of his own wrong is another matter, for this means that something, which in itself would be his of right under the contract, is denied to him, because the law is more moral than the contract. Of course, it is true that he cannot take advantage of his own wrong, or as it is sometimes put 'Dolus circuitu non purgatur.' This, however, seems to me to be obviously a case of personal disability, which cannot affect persons, who are neither parties to the dolus nor stand in the guilty person's shoes. Fraud is not something absolute, existing in vacuo; it is a fraud upon some one. A man who tries to cheat his underwriters fails if they find him out, but how does his wrong against them invest them with new rights against innocent strangers to it?" 11 In Lombard Australia Limited v NRMA Insurance Limited (1968) 72 SR (NSW) 45, a comprehensive motor vehicle insurance policy was issued in favour of the hire purchase company as owner and the hirer under a hire purchase agreement. The hirer committed suicide by driving the car into a tree with consequent extensive damage to the vehicle. The question was whether the hire purchase company could recover the cost of repair from the insurer. At 48, Wallace ACJ said: "Where the promise by the insurer to the two assured (they not being joint owners) is a several promise in respect of their respective interests in a motor car, a deliberate action of the hirer in causing damage to the vehicle cannot prejudice the owner's claim that his or its loss derived from accidental causes."

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See now Halsbury's Laws of England , 4th ed, vol 9, para 1081; Halsbury's Laws of Australia, vol 6, para 110 - 2985. 12 Judge Patten said that the correctness of Viscount Cave's proposition had been assumed or approved in many subsequent cases though in the United States and Canada a line of cases had developed which took what had been described as a "socially realistic approach" enabling an innocent "joint assured" to recover the appropriate proportion of a joint loss. The Judge referred to Higgins v Orion Insurance Co Limited (1985) 17 DLR (4th) 90, a decision of the Court of Appeal of Ontario, where many of the American cases were conveniently collected and reviewed. In Holmes v GRE Insurance Limited (1989) 5 ANZ Ins Cas 60-894 (the Supreme Court of Tasmania), Neasey J followed the Canadian decision and held a wife entitled to recover under policies of insurance covering household goods, stock and the contents of a residence and general store destroyed by a fire her husband and co-insured had deliberately lit. Some of the household contents were jointly owned, others separately owned. Neasey J held that the wife was entitled to recover in respect of the contents of the residence owned by her and in respect of one-half of the contents jointly owned. So far as the general store, which the couple ran in partnership, was concerned the wife was entitled to recover to the extent of her individual interest in the partnership property. However, Neasey J said that he had no doubt that the insurance contract was a composite insurance 13 Judge Patten quoted from Holmes v GRE Insurance Limited and said that there was no authority binding on him which required a conclusion contrary to that reached by Neasey J. He distinguished Advance (NSW) Insurance Agencies Pty Limited v Matthews (1989) 166 CLR 606. In that case the High Court reversed a decision of this Court and held that a fraudulent failure to disclose on the part of one co-insured was a fraudulent failure to disclose within s28 (2) of the Act. At 618-9 in a joint judgment, Mason CJ, Dawson, Toohey and Gaudron JJ said: "The judgments in the courts below devote much attention to the question whether the contract of insurance in the present case was a joint insurance or a composite insurance whereby, under the one contract, the co-insured insured their separate and individual interests as well as property jointly owned by them. In this Court the parties have taken up positions opposite to those taken in the courts below. Here the appellants submit that a contract of insurance whereby husband and wife insure their property is, in the absence of some expression of intention to the contrary, a joint insurance. This, so it is said, is because married persons seek a joint insurance of their household property, notwithstanding that it may be owned jointly as to part and separately as to part. On the other hand, the first respondent submits that, in accordance with the traditionally held view, the insurance of the parties' jointly owned property was joint insurance and the insurance of their separate property was composite. It is unnecessary to resolve this question in order to dispose of this appeal. But we should point out that, even in the case of a composite contract, some obligations are joint so that it is impossible to treat the contract of insurance as involving separate contracts: see Deaves v CML Fire and General Insurance Co Ltd (1979) 143 CLR 24 at 41; Federation Insurance Ltd v Wasson (1987) 163 CLR 303 at 311, 314-315, 318-319; United Shoe Machinery Company of Canada v Brunet [1909] AC 330 at 340."

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APPEAL 19 In upholding Mrs Baktoo's claim, Judge Patten preferred the "socially realistic" approach to the traditional view. However, this approach does not permit departure from the established law about the entitlement of one joint insured to claim indemnity for loss or damage caused by the deliberate act of another joint insured. The cases in which courts have adopted the "socially realistic" approach are correctly decided, if they are but examples of different considerations which may apply to some composite policies. There is a line of authority which explains in a principled manner why, in the case of a composite policy, the fact that one co-insured has deliberately caused loss by his own fraudulent act does not necessarily prevent an innocent co-insured from recovering under the policy. The distinction between joint and composite policies was discussed by Sir Wilfrid Greene MR in General Accident Fire and Life Assurance Corporation Limited v Midland Bank Limited [1940] 2 KB 388 at 404-5 when considering whether a joint insurance could exist where the interests of the parties are not joint in any sense. His Lordship said: "That there can be a joint insurance by persons having a joint interest is, of course, manifest. If A and B are joint owners of property - and I use that phrase in the strict sense - an undertaking to indemnify them jointly is a true contract of indemnity in respect of a joint loss which they have jointly suffered. Again, there can be no objection to combining in one insurance a number of persons having different interests in the subject-matter of the insurance, but I find myself unable to see how an insurance of that character can be called a joint insurance. In such a case the interest of each of the insured is different. The amount of his loss, if the subject-matter of the insurance is destroyed or damaged, depends on the nature of his interest, and the covenant of indemnity which the policy gives must, in such a case, necessarily operate as a covenant to indemnify in respect of each individual different loss which the various persons named may suffer. In such a case there is no joint element at all."

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23 While not meaning to down play the importance of fairness and justice, with due respect, such an approach cannot be applied to subvert the nature of the insurer's obligation to indemnify parties insured jointly. Moreover, if the object of the principle denying recovery for a fraudulent claim is to prevent a fraudulent party profiting from the fraud, that object is defeated by the orders made in the District Court. Mrs Baktoo personally has no claim to the insurance moneys. The insurance moneys are recoverable as an indemnity for the loss of partnership property. In every asset of the partnership, Mr Baktoo has an interest as well as Mrs Baktoo. 24 The consequence of indemnifying one partner only under a policy over partnership property is usefully discussed by the New Zealand Court of Appeal in Kelly v The National Insurance Company of New Zealand Limited (1995) 8 ANZ Ins Cas 61-239. At 75,709 McKay J, giving the judgment of the Court, said: "The question is accordingly one of construction. This case is not one of interests in domestic assets such as a house or contents. The insured are not simply listed one below the other, as in the Matthews case, nor joined conjunctively and disjunctively as in Higgins . Both are together identified as 'trading as Nelson Engine Rebuilders'. They are joined as a single entity, namely the partnership. A later endorsement certificate varying the policy and forming part of the contract is issued simply in the name "Nelson Engine Rebuilders'. The condition as to the insured taking all due care must sensibly be read as applying to the partnership, and to those responsible for its management, so that a breach by such a person deprives the partners of their cover. If it were not so, then despite Mr Kelly's recklessness, Mrs Kelly would be entitled to be paid to the extent of her share in the loss, but as a partner she would have to account to the partnership for the amount she received. Thus Mr Kelly would benefit despite his breach of the condition. The policy wording does not suggest a several cover of separate interests, but a joint cover for the benefit of a single enterprise."

MMI GENERAL INSURANCE LIMITED v BAKTOO & ANOR

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