Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd

Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd - [1998] HCA 38 - HCA 1998 case summary — Zoe

[78]

The nature and extent of the insurer's redress should depend on the nature and extent of the loss which it has suffered as a result of the insured's conduct. It should no longer be entitled to avoid a contract, and a heavy claim under that contract, merely because it has suffered a small, even insubstantial, loss as a result of a non-disclosure or misrepresentation. Of a proposed provision in terms identical to s 28(3), the Report stated [32] : An insurer is not entitled to avoid a contract for innocent misrepresentation or non-disclosure, but may reduce a claim by the amount of the loss it has suffered as a result of the misrepresentation or non-disclosure. The amount by which the claim is reduced is the amount which would place the insurer in the position it would have been in if the failure to comply with the duty of disclosure had not occurred or the misrepresentation had not been made. For example, if the insured would have charged a higher premium had the misrepresentation not been made, it would be entitled to reduce the claim by the amount of the additional premium. If the insurer would not have entered into the contract at all, it would be entitled to pay nothing in respect of the claim except the premium paid by the insured. If the insurer would have inserted a different term in the contract, then the insurer would only be liable for the amount for which it would have been liable if that term had been a term of the contract. The principle is the one generally applied in assessing damages for misrepresentation. It is accepted that one application of s 28(3) is to cases where, if disclosure had been made, the insurer would have accepted the risk but on different terms. There has been a division of opinion, which it is unnecessary now to resolve, as to the amount, if any, recoverable by an insured where the insurer would have declined the risk altogether had proper disclosure been made [33] . The litigation between the appellant and the respondent has been conducted on the footing that in a case where, were it not for the failure of the insured to comply with its duty of disclosure, the insurer would not have accepted the proposal at all, s 28(3) may operate to reduce the liability of the insurer to nil. 1. Newcastle City Council v GIO General Ltd (1997) 191 CLR 85. 2. Report No 20 (1982). 3. at p 117. 4. at p 284. 5. See Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 at 621-622; Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 at 926-928.

[142]

[T]he general rule is that a defendant who is required to indemnify a plaintiff against his liability to a third party is entitled to have the existence and precise extent of that liability proved against him in proceedings to which he is a party. That does not mean that a plaintiff may not compromise with his adversary save at the risk of losing his indemnity or at the cost of offering the defendant a choice between the compromise or the proof. A plaintiff acts in such a matter at his own risk and for his own benefit. If he compromises erroneously where there is no liability, he cannot make the defendant pay for his error. If he compromises successfully, he will be that much in pocket. It is true that if the defendant pays him more than the compromise, the plaintiff will be paid more than he has lost. But that is a thing which is bound to happen whenever the nature of the indemnity if precisely defined, and the area of its operation consequently circumscribed, and an event takes place outside that area. Devlin J rejected the argument that the duty on the plaintiff to mitigate its loss extended to acceptance of the settlement [78] . He then dealt directly with the suggestion that the liability of a third party could be fixed by the opinions and estimates of counsel in settlement negotiations in which the third party was not involved [79] : It is conceded that counsel's views on the facts and law on which the existence of liability is based are irrelevant, and that that is a matter for the court. Why as a matter of logic are his views on the facts and the law relating to the quantum of liability any different? What happens if the court thinks that nominal damages only have been proved? Is it permissible to investigate the chain of counsel's reasoning to see if it contains any error? Would an incorrect appreciation of the facts be a fatal error, or must it be an error of law? If in the case of a large number of items counsel has erroneously included one, does that invalidate altogether a settlement for a global sum? And so on. The point is not, I think, improved by the alternative submission that the settlement made must be reasonable. If this means that the sum paid must be the reasonable value of the claim when all the material facts are taken into consideration, it can only be that which the court would itself have awarded, and the inquiry is neither shortened nor affected by the advice of counsel. Therefore, it is contended that reasonableness must be judged as at the time of the settlement and on the information then available. This means that instead of weighing the true facts the court would have to weigh only those, however incomplete and erroneous, which were known to counsel. What standard of reasonableness can be applied to that? 1. Biggin [1951] 1 KB 422 at 426-427. 2. Biggin [1951] 1 KB 422 at 428. 3. Biggin [1951] 1 KB 422 at 429.

[169]

It is true that the law favours settlement. But it cannot do so at the price of a departure either from basic principles of law or the requirements of procedural fairness. It is fundamental to our legal system that, ordinarily, the party who asserts must prove. Where a claim is framed in the tort of negligence, the plaintiff must prove each ingredient of that tort: duty of care, breach and consequential damage. A failure to prove any ingredient will, in principle, be fatal to recovery. Whether the requisite causal connection has been shown between a particular breach of duty and particular loss or damage is essentially a question of fact. It is to be resolved on the probabilities as a matter of commonsense and experience [93] . If the claim is based on breach of a contractual duty to exercise reasonable care, and the plaintiff fails to establish that there was a cause of action which has been lost by breach, all that may be recovered is nominal damages [94] . Thus, claims in tort and contract (as here) equally postulate that the plaintiff must prove its loss. The burden of doing so, both evidentiary and forensic, is upon the plaintiff. Talk of the desirability of settlement is directed at the position as between A and B. Neither as a matter of logic nor of fairness can settlement between A and B govern the rights of A against C, unless C was party to that settlement or otherwise accepts what A and B have done. Biggin, in the Court of Appeal, correctly held that the settlement sum was not irrelevant because it fixes the upper limit of what may be claimed as an indemnity [95] . Often, for the avoidance of costs (now including possibly penalty costs), a third party in the position of the broker will accept such a settlement as defining the ambit of its liability. It may be more likely to do so if it is consulted in the negotiations and especially if its concurrence is procured [96] . But the desirability of settlement, and the modern laws and practices which facilitate it, cannot relieve a court of the duty of resolving lawfully and justly contested issues which are tendered for decision. That duty arises from the nature of a court as a court. Like Gummow J I regard this as rooted in a basic constitutional principle. Important as considerations such as efficiency, cost-savings and the promotion of settlement may be, they cannot detract from a court's duty in this regard [97] . Settlements will continue to be secured because of the pressure of court business, the saving of costs and the parties' evaluation of their own best interests. But such settlements must be achieved within a legal system which determines contested issues on the evidence and, relevantly, determines whether a party asserting damages has proved the damage.

[170]

As to the complaint that the broker was the occasion of the insured's predicament, so much may be conceded once it is found that the broker was in breach of its duty of care to, or contract with, the insured. But that merely sets the scene for the elucidation of the damage (if any) which flows as a result. Damage being disputed on the pleadings and resistant to compromise, it had to be proved as any other claim must be: by the tender of relevant evidence and the application to the facts found of the applicable principles of law. When the common law governed the liability of insurers, in cases of material non-disclosure, the position was much simpler. Then, indeed, proof of a negligent omission by a broker to notify the insured's adverse claims history (of which it had been informed) would, with very few exceptions, have given rise to an inference that the rejection of indemnity by the insurer would be the consequence of the broker's default. Now, however, the law has moved along. By the Act, material non-disclosure (except in case of fraud) is no longer fatal to an insured's claim. The insurer is specifically disentitled from avoiding the contract on that basis (s 28(3)). A hypothetical exercise must be carried out. That exercise is addressed not to the consideration of what, by the application of the pressures and evaluation of the risks of litigation, the insurer is willing to pay to avoid the risk of being found liable to indemnify the insured in the entirety promised under the policy [98] . Instead, the inquiry is concerned with something more specific and normative. This is to discover "the amount that would place [the insurer] in a position in which [it] would have been if the failure had not occurred or the misrepresentation had not been made" (s 28(3)). This is quite a different inquiry from that posed by the question whether a settlement negotiated at the door of a court was, or was not, "reasonable". So far as I can see, the last-mentioned question is irrelevant to the issue presented by the terms of s 28(3) of the Act. It is concerned with an inquiry which takes the decision-maker into the practice and likely response of the insurer which has issued the contract of insurance in question. The cases [99] and the textbooks [100] agree that s 28(3) is concerned with the practice of the particular insurer. In effect, the sub-section requires the elucidation of what that insurer would have done had the non-disclosure not occurred. The mere assertion of the insurer does not have to be accepted. In many cases, those seeking to unravel this point secure discovery. They try to find, from the treatment of similar cases, the way in which (if at all) the insurer in question would probably have been prepared to deal with the case in hand. Evidence of the insurer's practice lies at the heart of the issue presented by s 28(3) of the Act [101] . No doubt, if the particular insurer has no practice or is newly licensed or has lost its files, the matter is left to inference. But evidentiary silence on the point is perilous. The silence is not, in my view, filled by the sounds of a settlement achieved long after the proposal for insurance was tendered, in circumstances where the non-disclosure (and possibly other problems) are well identified and where the often unequal bargaining power of the parties looms larger than the hypothetical legal question which s 28(3) presents.

[175]

To the complaint that this approach produces inconvenient or inefficient outcomes, I would answer as follows. In practice it would enliven a realisation on the part of persons in the position of the insured of the not unreasonable proposition that they could not settle a claim against the insurer, without involving the broker, and expect, by such unilateral action, to bind the broker (a stranger to the settlement) with its consequences [103] . That would be no bad thing. It would encourage involvement of all parties in settlement negotiations to which all would contribute with knowledge of the contribution of the others. Again, no bad thing. It would discourage settlement of part of the litigation on the footing that the long pockets of remaining parties could bear more of the burden than was just and be obliged to do so without complaint although not involved in, and possibly even unaware of, the settlements effected with others. It would avoid effective foreclosure of contested issues between A and C by the mere fact that A had settled its dispute with B. Again, in my view, neither unjust nor surprising. It may be, as Gummow J suggests, that indemnity cases stand in a special position with respect to the effect given to the settlement of disputes with a third party. This is not an indemnity case. It was, or ought to have been, within the reasonable contemplation of the broker that, if it failed to carry out its obligation to exercise reasonable care and skill in obtaining the policy there would be a shortfall for the insured in the amount which otherwise would have been recoverable under a secure policy by reason of the operation of s 28(3) of the Act. It was for the insured, in case of dispute, to establish that shortfall. It was not within the reasonable contemplation of the broker that a consequence of its default would be that the insured and the insurer could settle their dispute and hold the broker liable for a sum defined not by a court resolving the dispute but by those parties looking after their own separate interests. The Court should not endorse any wider principle for the reasons which I have stated.

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Judgment (231 paragraphs)

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Cases Cited (33)