National Mutual Life Association of Australasia Limited v Chris Poulson Insurance Agencies Pty Ltd

National Mutual Life Association of Australasia Limited v Chris Poulson Insurance Agencies Pty Ltd - [1998] TASSC 31 - TASSC 1998 case summary — Zoe

[82]

The policies were made attractive to prospective policy holders by the offer of the agent to rebate all or a substantial portion of commission payable on the acceptance of the proposal. In many cases, the rebate enabled a policy holder to enter into the policy without the making of contribution. Given that, subject to certain circumstances, the first two years' commissions were paid on the acceptance of the proposal, NML was committed to the payment of $121,600 in return for the premium of $100,000. Year two could be regarded as cost neutral, whilst in years three, four and five, NML was required to pay each year a commission of $18,240. In addition, the projected figures indicated that the optimum return for a policy holder would be around years five to seven. When the extent of projected loss became apparent to senior management, steps were taken to discontinue further sale of the policies and to vary their terms so as to reduce the exposure of the company to future detriment. It is the nature of those altered terms and their timing which constitute the claimed causes of action comprised in the counterclaim. Central to the defendant's case is the proposition that, having introduced a new product, the plaintiff was required, by virtue of a contractual and fiduciary duty, to maintain its effectiveness and not take steps to reduce its own exposure to harm at the expense of its own agents. The problems associated with the policies became apparent in January 1990 and modifications effected to the conditions on which proposals would be considered. A set of projected figures was prepared which presented a less advantageous return than that which accompanied the 1989, early-1990 documentation. An example (D1.1, at 252) indicates that a tax advantage was not regarded as a relevant component and that the optimum return to any policy holder would occur in the second and third years of the policy, with a subsequent decline into loss if the loan against policy option was maintained. The document is reproduced as Annexure B to this judgment.

[114]

It is a reasonable inference that both CPIA and NML were aware, as of that meeting, that there would be further advantage to CPIA by the payment of commission for years three, four and five of any renewed policies. The figures shown on the initial projection (D1.1, 272) and the evidence of policy holders support the conclusion that there was an expectation that the policies would remain in force for terms of five years or more. In part, it was perceived that there might be tax advantage in maintaining the policies for a reasonable length of time. Following the meeting, CPIA was authorised to obtain six more "Z" policy proposals only. Records indicate that some eleven proposals were prepared (all by Poulson) between 22 and 24 January. At the time of and immediately subsequent to the meeting on 14 January, Tasmanian management of NML commenced a series of measures designed to inhibit the attractiveness of the "Z" policies, and to isolate any loss from the Tasmanian ordinary accounts or returns to ensure that they were shown as figures referable to the national rather than local organisation. The process generally accorded with similar steps taken in other regions. One of the complaints made by the defendant is that there was, in Tasmania, unlike other regions, lack of proper consultation between management and agent, and that such shows absence of faith and propriety. There was ill-feeling between the state manager, Terry Smith, and Chris Poulson, and it may be that a more comprehensive form of consultation between principal and agent would have lessened the ill-feeling. But such, without more, does not establish breach of contract or duty. There was consultation at a national level with an organisation entitled CPPA which represented agents and which, at one stage, had as its president Falkiner, the agent who had introduced Poulson to the nature of the "Z" policies (D1.3, 124), and it is reasonable to expect that agents did not look favourably on decisions which would affect their returns. Communication of conditions of acceptance was effected by letters addressed to CPIA and through a corporate information sheet (D1.3, 075). Those communications coincided with the decision by NML to set a time frame for the cessation of future sales of the policies and to alter the conditions of acceptance. CPIA was authorised to market "Z" policies, but any proposals which had not been received (D1.3, 034) by 5pm on 6 February 1990 were to be subject to the amended conditions.

[150]

The amended projection figures were furnished shortly thereafter. Between 2 and 5 February 1990, CPIA had completed a further fifty-two proposals. It was now required to make a fresh presentation to each client and obtain assent to the letter of comfort. It is relevant that at this stage no proposer was bound to proceed with the investment. In any event, each had the further option of a fourteen day "cooling off" period. Likewise, CPIA elected to continue with its marketing strategy with the knowledge of the altered terms. The defendant does not contend that NML was precluded from withholding acceptance of proposals until the terms were met, and any variation of the terms of commission was accepted by CPIA and constituted the contract. That, of itself, does not meet CPIA's claim that there had been a breach of an implied term to treat the agent in good faith. CPIA, having completed the procedures in early March, forwarded the documentation to NML and, after processing, all were accepted and policies issued. Premiums were paid, policies converted into annual premiums, rebates effected and commissions credited to CPIA. Each sub-agent had received a commission equivalent to one month's premium, and it is possible CPIA received a similar payment in one or two cases. Further, CPIA received the additional sums of "volume bonus". The period late December until early March can be regarded as the first phase of the conduct about which complaint is made. Relations between Poulson and the state manager of NML, Smith, continued to deteriorate. A number of factors, doubtless including the conduct of both parties with respect to the "Z" policies, contributed to that deterioration and it is not necessary to give further consideration to them. The contract of agency was terminated on 21 September 1990. During this period, NML took further decisions affecting the future viability of the "Z" policies. Those decisions included a strict examination of commission entitlements (D1.1, 326, 327, 331, D1.3, 99 - 100), the separation of financial reporting terms (D1.1, 321 - 324), discounting of surrender values (D1.1, 340, 365(a), 378 - 379) and an evaluation of the financial implications of a continuation of the policies (D1.1, 341 - 350). An assessment was made that the terms of the policy rendered a two year surrender advantageous to the policy holder and reduced the exposure of NML. Despite the evidence of Smith that commission obligations were not a factor since no-one realistically expected the policies to be renewed beyond year two, the documentation points to the opposite conclusion (D1.1, 382). In September 1990, NML advised, through its personal business bulletin (D1.3, 108 - 109), alterations to the bonus and interim bonus rates. This period represents the second phase of the conduct. Thereafter, NML proceeded to announce details of surrender values of the policies (D1.3, 127 - 131), a process culminating in the express service offer previously outlined. Although no longer an agent for NML through CPIA, Poulson was involved in meetings with and gave advice to the policy holders, and all (including members of the Poulson family) borrowed the maximum amount permitted by the value of each policy and allowed the residual value to be debited against interest due, thereby bringing it to an end. Each policy holder did so, many having sought the advice of Poulson, in order to obtain a substantial financial advantage.

[155]

The relevant time for consideration of the existence of such a term is the date of the agreement. The intention of the parties was to sell and maintain in force insurance products for common commercial benefit. The defendant advances the position that there could be no intention that one would obtain advantage at the expense of another. But the converse is equally valid in that neither party could expect to suffer detriment for the benefit of the other. It was not a necessary ingredient of the commercial objective of the parties that, had they put their minds to the circumstances of the "Z" policies (Shirlaw v Southern Foundries (1926), Limited [1939] 2 KB 206), an uneconomic defence of a product was necessary to make the agency agreement work in a practical sense, or that its absence gave rise to an unworkable situation (Hospital Products Limited v United States Surgical Corporation and Others [1984] HCA 64; (1984) 156 CLR 41, Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769). Mutuality of interest cannot be determined by reference to the perception of one of the parties. NML permitted the continuation of the marketing of "Z" policies at a time when it knew that such would be deleterious to its corporate interest. In doing so, it kept faith with those intending policy holders who were aware of their existence and permitted the agents to continue with marketing, albeit with different conditions. But the projected figures provided by NML were forward estimates only. The company had not guaranteed the earlier figures. In providing revised projections, it attempted to reduce the expectations of others and thus reduce its own exposure. But it was still open to the agent to take no special steps to market them or for the clients to complete proposals. Had the company arbitrarily rejected each and every proposal submitted by the defendant, then it might be a breach of an implied term, "not to capriciously or unreasonably reject business introduced to it by one of its sole agents". But such a term can be identified as of the date of the agreement. The terms sought to be implied in this case can only be identified or articulated by reference to events occurring subsequent to the agreement and lack of clarity or precision of the claimed term which remained unidentified until a particular occurrence is a factor militating against its existence (Ansett Transport Industries (Operations) Pty Limited v The Commonwealth of Australia and Others [1977] HCA 71; (1977) 139 CLR 54). The conduct of NML in making it advantageous to a policy holder to borrow against the policy and make a "windfall" gain, even though intended to effect surrender was not unlawful and did not preclude the policy holder from maintaining the policy. If policies were maintained, the defendant was entitled to further commission. The decision was that of the policy holder acting in self-interest. Even assuming that there existed a general implied term of the nature contended for, it was the decision of each policy holder, not the plaintiff, which caused the "surrender" of each policy. In 1991, the plaintiff provided advice to policy holders, which proved to be in their best interests, and each took advantage of that advice. It is not necessary to imply the terms sought in order to give business efficaciousness to the agency agreement. The agreement provided for the payment of commission upon the occurrence of an event, that is, the renewal of a policy. There is no need to imply a term dependent on the occurrence of a different event, namely, the non-renewal of a policy in circumstances where the principal, acting lawfully, makes renewal less advantageous.

[197]

The director of CPIA, Poulson, was an experienced agent. He perceived significant benefit from the sale of the policies. Through him the company was aware that there was a limited time frame during which the policies would be available. The defendant acted with alacrity. Some proposals were completed on the day on which Poulson first became aware of the existence of the policies and a method of sale. In January, Poulson interrupted his holiday to effect sales and the intense activity during the weekend of 3/5 February belies any claim that these were ordinary transactions. The capacity to rebate commission amounting to $100,000 would lead any experienced agent to the conclusion that benefit was to be had at the expense of the principal. The rebating of the commission lay at the centre of the ability to achieve the high volume of sales, thereby increasing benefit to the agent at the cost of the principal. Failure by the plaintiff to reject the marketing strategy presented by Poulson was not a matter of bad faith. NML permitted continuance of the strategy, since it was legally and morally bound to permit the sale of its product. It was not obliged to discuss its inner deliberations concerning minimisation of loss with its agent until it had reached a concluded position. When the plaintiff had reached a decision concerning the terms of acceptance, it advised the defendant in correspondence and through its bulletins (D1.1, 260, D1.3, 75 - 78). The decision to vary bonus rates was notified promptly (D1.2, 551 - 556, D1.2, 636 - 638, 648 - 649, D1.3, 108 - 109). There was no obligation to further advise CPIA after the agency agreement ended in September 1990. But there remain two fundamental reasons why the claim of breach of duty should be rejected. The defendant was advised of the new terms of acceptance before the proposals were tendered to NML. It was aware of the new projections and any analysis of those figures would show to an average person that the optimum return would be obtained early in the life of the policy. Renewal of policy beyond year two was not commercially viable and such was, or ought to have been, obvious to the defendant. It continued with intensive marketing since it knew that despite the altered projections and the likelihood of non-renewal, it stood to make significant profit by continuance. The financial records of CIPA support this conclusion. Those records, discerned from within the thickets of accounting, disclose that CPIA received commissions (including volume and discretionary bonuses) in excess of $6m. Allowing for rebating the payment of commission to sub-agents, CPIA received at least $1.2m in commissions from the sale of "Z" policies. By a process of "accrual" accounting, the sum of $1,069,996 was shown as "Z" related income for the year ending 30 June 1990, with a further sum of $334,687 (paid before 30 June 1990) shown in the accounts for the following year. Varying draft documents were prepared in May/June 1990, which showed differing approaches, doubtless designed to minimise tax and the use of a "suspense" account permitted the deferral of income to the following year.

[216]

The defendant seeks an award of damages based on the loss suffered by CPIA incurred by the non-payment of "New Business" commission for years three, four and five, and limits its claim to the sum of $2,025,000. In limiting its claim, it does not concede that the Court is precluded from assessing damages on the basis of profits made by the plaintiff and general detriment to itself. It simply accepts a maximum quantification of any award. The plaintiff submits that any award of damages should simply restore CPIA to the position it would have been in had there been no breach. Central to the defendant's claim is that it expended much time and resources in marketing the policies with the clear understanding held by both parties that, because of rebating, its return would primarily be gained for its commission for years three, four and five. It claims the breach caused that loss. It has not been necessary, thus far, to make findings concerning the credibility of opposing witnesses, except in relation to the policy holders. It is possible to determine the breach or otherwise of contractual and fiduciary duty without recourse to any assessment. However, such findings are required in the assessment of the respective claims of enhancement and detriment. Those findings, insofar as they may be required for the determination of the prior questions of breach of contractual and fiduciary duty, would not advantage the defendant. CPIA entered into the marketing with alacrity. It could see significant benefit even in the short-term. The success lay in the rebating of commission. In effect, CPIA took advantage of a not ungenerous commission rate, referrable to more ordinary policies, in order to benefit itself at the expense of the plaintiff which had introduced a "flawed" policy. The claim by Poulson that it was his intention that the policies remain in force for ten to fifteen years is not accepted. The claim is belied by the figures in both presentations and his own understanding of the implications inherent in the policies themselves. The second set of figures certainly showed that the value had decreased from the second year. Other witnesses certainly perceived such to be the case. The claim is further weakened by the evidence that there were taxation implications in any concession that policies were purchased only for short-term gain. In part answer to a challenge based on the existence of the projection figures, Poulson stated that he did not understand the change to accelerated surrender values at the time of the second presentation. It is difficult to accept his response, since it is contrary to the documentation presented to and explained by him to others (D1.1, 248, D1.1, 260, D1.3, 075), and Note 9 of the "important policy notes".

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (221 paragraphs)

National Mutual Life Association of Australasia Limited v Chris Poulson Insurance Agencies Pty Ltd (No 5) [1998] TASSC 31 (8 April 1998)

Parties

Cases Cited (8)