Citation: [2011] NSWSC 416
Court: Supreme Court of New South Wales
Date: 12 May 2011
Judge: Ball J
Background
A medical practitioner took out an income protection and business expense insurance policy in December 1993. He made a claim on the policy in May 1995, and the insurer initially accepted the claim and paid benefits for several years. In November 2002, the insurer denied liability for further payments on the basis that the insured no longer met the policy's definition of "Total Disability."
The insured commenced proceedings for wrongful repudiation of the policy. In response, the insurer filed a cross-claim asserting that the insured had made fraudulent misrepresentations and non-disclosures in his application form, including false answers to questions about mental or nervous disorders and drug or alcohol dependency. The insurer sought to avoid the policy under section 29(2) of the Insurance Contracts Act 1984 (Cth) and to recover approximately $492,447 in benefits already paid.
The insured denied the misrepresentation claims and argued, in the alternative, that the insurer had affirmed the contract or waived its right to rely on any misrepresentation. He also raised a change of position defence against the restitutionary claim.
Legal Issues
- Whether the insured was guilty of fraudulent misrepresentation or non-disclosure in completing the proposal form, and whether that entitles the insurer to avoid the policy under section 29(2) of the Insurance Contracts Act 1984 (Cth)
- Whether the insurer waived or affirmed the contract, thereby losing the right to avoid it
- Whether the insured's claim for damages for wrongful repudiation should succeed on the basis that he remained "totally disabled" within the meaning of the policy
- Whether the insurer was entitled to recover amounts paid under the policy if avoidance succeeded
- Whether the insured's change of position defence defeated the restitutionary claim
Decision
Ball J found that the insured had made fraudulent misrepresentations in the proposal form by denying any history of mental or nervous disorder and drug or alcohol dependency, when his actual medical history indicated otherwise. The court was satisfied that the insurer would not have issued the policy had it known the true position, and accordingly held that the insurer was entitled to avoid the policy under section 29(2) of the Insurance Contracts Act 1984 (Cth).
The court rejected the defences of waiver and affirmation. Ball J found that affirmation requires the innocent party to have sufficient knowledge of the facts giving rise to the right to avoid the contract, and to have communicated an election to affirm. The insurer did not have that level of knowledge at the relevant time, and so no binding election to affirm had been made. The waiver argument did not provide a separate defence on the facts.
On the insured's primary claim, the court dismissed the amended summons, finding that the insured had not established entitlement to damages for wrongful repudiation, in light of the policy avoidance.
On the restitutionary cross-claim, however, Ball J upheld the change of position defence. The court found that the insured had used the benefit payments to meet living expenses he would otherwise have reduced or avoided, and had foregone other income-earning opportunities in reliance on those payments. Although the general rule is that spending money on ordinary living expenses does not constitute a relevant change of position, Ball J held that the principle does not apply where the payments were made precisely to enable the recipient to meet living expenses and the recipient would have taken different steps had the payments not been made. In those particular circumstances, it would be unjust to require repayment. The cross-claim was accordingly dismissed.
Orders Made
- The amended summons be dismissed.
- The cross-claim be dismissed.
- The plaintiff pay the defendant's costs of the proceedings.
Key Takeaways
- A party seeking to establish affirmation of a contract must demonstrate both sufficient knowledge of the facts giving rise to the right to elect and a communicated election. Where that knowledge is absent, no binding affirmation arises even if the other party has continued to perform the contract.
- Under section 29(2) of the Insurance Contracts Act 1984 (Cth), an insurer may avoid a policy where the insured has made fraudulent misrepresentations that were material to the insurer's decision to issue cover.
- The general principle that spending money on ordinary living expenses does not constitute a relevant change of position is not absolute. Ball J held that where payments are made for the specific purpose of enabling a recipient to meet living expenses, and the recipient would have reduced those expenses or taken other steps if the payments had not been made, a change of position may be established.
- The change of position defence operates as a complete bar to recovery in appropriate circumstances, not merely as a pro tanto reduction of the restitutionary claim.
- Despite succeeding on the change of position defence and defeating the restitutionary cross-claim, the insured was ordered to pay the insurer's costs, because the defence was raised only by late amendment and occupied a small portion of the overall litigation. The insured had failed on all primary issues.
Legislation and Cases Referenced
Legislation:
- Insurance Contracts Act 1984 (Cth), particularly section 29(2)
- Gaming Act 1845 (UK)
Cases:
- Agricultural & Rural Finance Ltd v Gardiner [2008] HCA 57; 238 CLR 570
- David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
- Jones v Dunkel (1959) 101 CLR 298
- Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548
- Morley & Ors v Australian Securities and Investments Commission [2010] NSWCA 331
- Mercantile Mutual Insurance (Australia) Pty Ltd v Selikas [2000] NSWCA 331
- Gertsch v Atsas [1999] NSWSC 898
- Muggleston v National Mutual Life Assn of Australasia Ltd [2004] NSWSC 913
- Jenner v National Mutual Life Association of Australasia Ltd (1986) 4 ANZ Ins Cas 60-685
- Larratt v Bankers and Traders Insurance Co Ltd (1941) 41 SR (NSW) 215
- Newbigging v Adam (1886) 34 Ch D 582
- Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1998] Lloyd's Rep IR 151
- Glencore International v Alpina Insurance [2003] EWHC 2792; [2004] 1 All ER (Comm) 766
- Coastal Estates Pty Ltd v Melevende [1965] VR 430