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COMMERCIAL INSURANCE – RECENT DEVELOPMENTS
CPD SEMINAR NO. 16
18TH AUGUST 2004
R J DOUGLAS SC AND K F HOLYOAK
A. PRINCIPLES OF CONSTRUCTION: 1 B. PROOF WHERE EQUALLY CREDIBLE EVIDENCE: 3 C. GOOD FAITH – ELDORADO OR FOOLS GOLD?: 6 (a) INTRODUCTION: 6 (b) COMMON LAW: 7 (c) GOOD FAITH UNDER THE ICA: 11 (d) REMEDIES: 16 (e) SECTIONS 13 AND 54: 17 (f) SECTIONS 13, 54 AND 56: 18 D. ICA SECTION 56: 19 E. ICA SECTIONS 40 AND 54: 20 F. EXCLUSIONS: 22 (a) WHO IS THE INSURED?: 22 (b) CHARACTERISING THE SUBJECT OF INDEMNITY: 26 (c) FROM WHERE DID THAT WATER COME?: 31 (d) WHEN DID I GET SICK (ICA SECTION 47)?: 35
A. PRINCIPLES OF CONSTRUCTION:
1. A commercial insurance policy is but a species of contract containing rights and obligations albeit one regulated not just by the general law but by the Insurance Contracts Act 1984 (Cth) (“the ICA”).
2. An insurance contract, however, contains particular drafting measures not common in other commercial contracts. The ubiquitous policy cover and cognate exclusion clauses are examples. It is useful to rehearse some of the basic principles of construction of commercial policies.
3. The following are the relevant principles which regulate the construction of a commercial insurance policy:- 1. the insured bears the onus of invoking the primary cover afforded by the policy together with any proviso to any exclusion to the cover, whilst the insurer bears the onus of invoking any such exclusion; 2. the policy ought be construed in the same manner a commercial document; 3. the policy must be read in its commercial setting in such a way as to fulfil and not restrain its commercial purpose; 4. the interpretation of the clauses in dispute ought ensue by construing each clause according to its natural and ordinary meaning, read in the light of the policy as a whole, thereby giving direct weight to the context in which the clause appears, including the nature and object of the policy; 5. it is appropriate to resolve any ambiguity in the policy by reading it as a whole; 6. in resolving ambiguities, a reasonable construction is preferred as representing the presumed intention of the parties; 7. the policy, having been proffered by the insurer, is subject to the contra proferentem rule of construction, however, such rule is one of last resort and a principle for construction to remove ambiguities only where more rational approaches fail, but where applied the insurer as proferens must be capable of clear identification; 8. in construing whether a claim falls within a policy exclusion, it is necessary to focus on the facts which give rise to the claim and not the form in which the claim is asserted; 9. it is relevant to have regard to the background against which the policy was entered into in determining whether the claim fell within its terms.
4. McCann v Switzerland Insurance Australia Ltd concerned the construction of an exclusion clause. Gleeson CJ observed:
"A policy of insurance, even one required by statute, is a commercial contract and should be given a business-like interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure."
5. In McCann Kirby J addressed the basic principles applicable to the resolution of ambiguities in interpretation which he had collected in Johnson v American Home Assurance Company. They included the following: 1. An insurance policy is a species of commercial contract and so must be interpreted giving to the words used their ordinary and fair meaning; 2. The meaning to be given to an insurance policy must take into account the commercial and social purposes for which it was written; 3. Where, in a contract written for application in different jurisdictions, language has been used which enjoys a settled meaning, courts will ordinarily endeavour to adhere to that meaning, particularly in a policy of a commercial character upon which the parties might have been expected to obtain expert advice; 4. Notwithstanding the primary duty of courts to give meaning to the words in an insurance policy, in cases of ambiguity a 'liberal approach' will generally be adopted in the construction of insurance contracts. However, courts now generally regard the contra proferentem rule as one of last resort. It is preferable that judges should struggle with the words actually used as applied to the particular circumstances of the case rather than by the application of mechanical formulae. 6. Kirby J posed the question in that case as being, so far as insurance policies were concerned: “what did a practical and business- like construction of the … clause suggest?”
B. PROOF WHERE EQUALLY CREDIBLE EVIDENCE:
7. Not infrequently an insurer alleges that an insured has connived in the insured loss. One cannot gainsay, in such a case, that the onus falls on the insurer to prove such fraudulent connivance. But what if, at the end of a trial, the court is left with equally compelling and credible evidence on each side as to the cause of loss in such a case?
8. In Rhesa Shipping Co SA v. Edmunds the House of Lords eschewed the notion that the trial judge ought to have chosen between the competing versions, Lord Brandon observing:-
“… the judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. No judge likes to decide cases on burden of proof if he can legitimately avoid having to do so. There are cases, however, in which owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take.”
9. This line of authority, which has its genesis in marine insurance, was taken up by the New South Wales Court of Appeal, in a non-marine context, in Simon v. NRMA Insurance Limited. The court rejected criticism of a trial judge who, after hearing the evidence in a case involving a claim on an agreed value policy which insured against was the vehicle being stolen, proceeded to “refrain from making any finding of fraud against the plaintiff … I feel that it is sufficient for me to say that I am not satisfied on the balance of probabilities that the plaintiff has established that the motor vehicle was stolen”. The court observed:-
“The appellant's primary argument was that the finding that the appellant had failed to discharge the onus of proof on the balance of probability was, in the circumstances of the case, necessarily a finding of fraud so that the learned judge had fallen into error by failing to apply to it the requirements of Briginshaw v Briginshaw 60 CLR 336. However, I entirely fail to see how Briginshaw has any bearing upon the failure of the appellant to discharge the onus which clearly rested upon him. Moreover, I do not think that the finding that the learned judge made is necessarily equivalent to a finding of fraud. It was perfectly open to the learned judge to say, as he did, that he was not satisfied that the appellant had proved that the car was stolen, on the footing that the probability that it was was exactly equal to the probability that it was not: see Palamisto General Enterprises SA v Ocean Marine Insurance Co Ltd (1972) 2 QB 625 at 636 per Sachs LJ quoting with approval the dictum of Branson J in Compania Naviera Vascongada v British and Foreign Marine Insurance Co Ltd (The Gloria) (1936) 54 LL LR 35 at 50-1. The doubt about the correctness of the passage at which Sachs LJ hints seems not to be justified : see 25 Halsbury's Laws of England (4th Ed) para 74. "Stolen" in this context means, of course, taken away without the cooperation or connivance of the appellant; the only reasonable alternative was that the appellant was involved in the vehicle's disappearance from the place where it had been parked.” (emphasis added)
10. A subsequent New South Wales Court of Appeal in Hammoud Brothers Pty Ltd v. NRMA Insurance Ltd, on 5th February 2004, declined to rule as to the efficacy of the approach taken in Simon, but three weeks after, on 27th February 2004, the Queensland Court of Appeal embraced it, in a marine insurance context, in Ocean Harvester Holdings Pty Ltd v. MMI General Insurance Ltd.
11. In Ocean Harvester the plaintiff insured claimed under a marine hull policy for loss, by sinking, of the insured trawler. The insuring clause and exclusions were conventionally drafted. The defendant insurer pleaded in advance a positive case of scuttling. The plaintiff led evidence of its director and trawler skipper Kerr and a fellow skipper Thompson, whose trawler came to the assistance of the sinking insured trawler, the evidence of each being consistent with unfortuitous or accidental casualty. The defendant led evidence of Thompson’s deckhand, one Dobbins, whose evidence was redolent of the plaintiff’s vessel being scuttled.
12. The trial judge (Cullinane J) was not impressed with the evidence of Kerr but found each of Thompson and Dobbins to be credible and acceptable witnesses. In consequence he found that the defendant insurer had not made out the case of scuttling but the evidence of Dobbins founding such case was still acceptable evidence and thus he found for the defendant on the basis that the plaintiff had failed to discharge the onus of proving accidental loss.
13. The decision was upheld on appeal. The plaintiff (the appellant on appeal) submitted that once the pleaded case of scuttling was rejected, a finding for the plaintiff ought have followed as a matter of course. In rejecting this submissions McMurdo P (with whom Davies JA and Mackenzie J agreed) observed:-
 The appellant's submissions are misconceived. Under the contract of insurance the appellant had to establish the ship sank by accident; this was a matter to be determined by his Honour on the evidence at trial, which included Dobbins' evidence that Kerr and Thompson scuttled the boat. On the accepted evidence, his Honour was not persuaded on the balance of probabilities that Kerr and Thompson had scuttled the boat, a criminal offence, but nor did the evidence satisfy him on the balance of probabilities that the boat was accidentally sunk; the appellant's claim was unproved and failed. Whilst it is unusual for judges to be left in such a state of uncertainty as to evidence, it is not uncommon in cases of this sort where judges are not lightly persuaded to accept that protagonists have acted with criminal intent but nor are they necessarily satisfied to the civil standard that the claim is made out: La Compania Martiartu v Royal Exchange Assurance  1 KB 650, 657, approved in Skandia Insurance Co Ltd v Skoljarev (1979) 142 CLR 375, 391-392. Compania Naviera Vascongado v British and Foreign Marine Insurance Co Ltd (The Gloria)  54 LlR 35, 50-51; Northwestern Mutual Life Insurance Co v Linard Edinburgh Assurance Co (The "Vainqueur")  2 LlR 398, 402-403 and Regina Fur Company Ltd v Bossom  2 LlR 425, 434. A judge would be less likely to be so uncertain where a respondent merely made unaccepted and unsupported allegations (something less likely to occur in Queensland under the UCPR: See r 166, especially (4) and (5)), but each case will turn on the strength of the evidence called in it. The learned primary judge's reasoning here was unimpeachable.” (emphasis added)
14. Other recent cases, in the sphere of general insurance, in which a similar approach was taken, are Vidal v. NRMA Insurance Ltd and Anderson v. Aon Risk Services Australia Ltd.
C. GOOD FAITH – ELDORADO OR FOOLS GOLD?:
15. The term “utmost good faith” is not defined in the Insurance Contracts Act 1984 (“ICA”). It is frequently referred to simply as “good faith”. Without definition, the potential scope and application of sections 13 and 14 of the ICA is beguiling.
16. Sections 7, 12, 13 and 14 of the ICA provide:-
“7 Effect of Act on other laws
It is the intention of the Parliament that this Act is not, except in so far as this Act, either expressly or by necessary intendment, otherwise provides, to affect the operation of any other law of the Commonwealth, the operation of law of a State or Territory or the operation of any principle or rule of the common law (including the law merchant) or of equity.
12 This Part not to be read down
The effect of this Part is not limited or restricted in any way by any other law, including the subsequent provisions of this Act, but this Part does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure.
13 The duty of the utmost good faith
A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
14 Parties not to rely on provisions except in the utmost good faith
(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.
(2) Subsection (1) does not limit the operation of section 13.
(3) In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise.”
17. Although construing terms of a statute, particularly a remedial statute, with reference to the preceding general law position may or may not find favour with the Court, reference to the preceding common law position to resolve any ambiguity regarding the meaning of “good faith” is invited because the extrinsic material to which resort can be had includes the ALRC (1992) report no. 20 which was the progenitor of the ICA. The report specifically discusses the common law position and that the intent of the recommendations was to resolve some doubts in the common law position. Consequently, it is of some interest to consider, briefly, what role, if any, a duty of good faith plays at common law or in equity in a contractual relationship and particularly in contract of insurance. It is trite law that a contract of insurance is an exceptional contract imposing a duty of utmost good faith upon the parties.
(b) COMMON LAW:
18. In Alcatal Australia Ltd v. Scarcella the New South Wales Court of Appeal expressed the law of New South Wales, in relation to contracts generally, in the following fashion:-
“The decisions in Renard Constructions and Hughes Bros mean that in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed on parties as part of a contract.”
19. In Renard Priestley LJ stated:-
“People generally, including Judges and other lawyers, from all strands of the community, have grown used to the Courts applying standards of fairness which are consistent with the existence in all contracts of a duty of good faith and fair dealing in performance. In these days anything less is contrary to prevailing community expectations.”
20. Priestley LJ then adopted paragraph  of the “Restatement of Contracts” (2nd – USA) which provides:
“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.”
21. The learned authors of Cheshire and Fifoot’s “Law of Contract” 8th Australian Edition enthuse:-
“Notwithstanding the reluctance shown by Australian Courts to treat good faith as a term implied in all contracts, it can scarcely be understood in any other way. The “Restatement of Contracts”, second (USA) unequivocally adopts this approach, and so do many other jurisdictions. Thus a general obligation to act in good faith is imposed by law on contracting parties in Europe, United States, Canada, New Zealand, China and Japan and in other parts of the world. Indeed “good faith” maybe the most widely prescribed standard of conduct globally for contracting parties. For that reason its recognition in Australian Law is desirable notwithstanding that its reception raises some conceptual difficulties.”
22. The High Court is yet to speak on the matter. The reluctance spoken of by the authors of Cheshire and Fifoot is most markedly seen in Queensland. The Court of Appeal did not rush to embrace this aspect of Renard when distinguishing it in Gold Coast Waterways Authority v. Salmead Pty Ltd and there is an earlier single Judge decision which appears to point in the contrary direction.
23. The confidence the New South Wales Court of Appeal expressed in Alcatal in this regard may come as something of a surprise to Chesterman J who, considered the duty of good faith in its common law manifestation, specifically in relation to an insurance contract, in a detailed and elaborate way in Re Zurich Australian Insurance Limited. At paragraph  His Honour referred to a passage from a United States Decision which His Honour thought served to illustrate that:-
“… America jurisprudence is so different from the common law as to make it difficult to extract anything of use.”
24. The survey by Chesterman J of the authorities and academic musings of what the duty of good faith consists of and how it is to applied at common law shows both the potential reach of an obligation of “good faith” and the conceptual and commercial difficulties in imposing such an obligation upon parties having regard to the general adversarial nature of commercial dealings and, consequently, the legal framework facilitating those dealings.
25. At common law there is authority that the obligation of the duty to act in good faith turns on whether “the essential element of honesty” has been offended. In a passage widely adopted, Professor Sutton offered the following definition:-
“The term “good faith” has many different meanings in the legal context but in essence it encompasses notions of fairness, reasonableness and community standards of decency and fair dealings. It imposes a market standard of fairness, that is, what is customary an acceptable conduct in the particular commercial activity concerned as established by expert evidence.”
26. If “good faith” were to have a content as amorphous as this, its usefulness maybe great and varied.
27. In Re Zurich Australian Insurance Limited Chesterman J recoiled from such a broad statement of content as appears in Professor Sutton’s text and adopted in some of the authorities. His Honour stated that he did not find the formulations which concentrated on the essential element of honesty as providing any degree of clarity or specificity as to the nature and extent of the duty. His Honour stated that the multiplicity of synonymous and rhetorical appeals to honesty, fairness, decency or lack of caprice merely caused confusion. His Honour also expressed difficulty in comprehending what utility the good faith obligation could play in relation to the powers or discretions conferred on one of the parties to a contract if the essence of the obligation is to act honestly. His Honour made the point that a dishonest exercise of the power is no exercise of the power at all. Dishonesty encompasses use of the power for a collateral or ulterior purpose or motive. The law of contract does not require a separate doctrine of good faith to provide a remedy in such case. The law would simply disregard the purported exercise of the power as having no legal effect.
28. His Honour then disapproved of two decisions involving the application of sections 13 and 14 of the ICA as not being a convincing exposition of the nature or scope of the duty enacted in section 13 and 14, or, for His Honour’s purposes, at common law to which reference will be made later.
29. It is the view of Chesterman J in Zurich that the obligation of good faith was not a separately existing independent duty but rather:-
“ … an implied limitation on the manner in which an insurer may act when its interests conflict with the insured in relation to compromising a claim against the insured. The implied limitation is that the insurer must exercise its powers with due regard to the interests of the insured.”
30. His Honour then recognised that even this more narrow interpretation of the obligation contained uncertainty. What is “due regard”? His Honour stated that it could be said with confidence that due regard will depend upon the nature of the right being exercised and the circumstances in which it comes to be exercised but then made the confession “but that is not to say very much”. In the end, on the facts before His Honour, he considered it critical that upon the true construction of the contract there could be divined a mutual contention that the insurer had a discretion which could be exercised in circumstances where the interest of the insured and the insurer were opposed. The condition in question conferred upon the insurer the right to act in a way which was inimical to the insured’s interest.
31. Given the difference in judicial approach and attitude to the content, scope and application of the obligation of good faith, an opportunity for advocacy presents itself especially as section 13 has now enshrined the obligation as an implied term of the contract. However, a cautious approach to the content of the duty (perhaps understandably for good reasons), in particular in how the duty operates within the ICA and compositely with provisions of the ICA such as section 54, may confine the term of good faith only to an ancillary role in support of other more specific duties, as Chesterman J thought, rather than having any independent roaming commission.
(c) GOOD FAITH UNDER THE ICA:
32. The duty of good faith most usually finds expression in the more specific duty of disclosure. However in light of section 12, and the tight regulation of disclosure within the ICA itself, the operation of good faith in that regard is often in the ancillary or supporting role to enhance the nature and scope of the duty of disclosure.
33. Less certain is the operation of the good faith obligation in the post- contractual relations between the parties which was the issue addressed by Chesterman J in the Zurich in the pre-ICA context.
34. Conceptually, once the contract has been formed, the parties intentions ought be found within the four corners of their bargain. Can some over-arching concept, now expressed as a term of the contract by dint of section 13 of the ICA, together with the operation of section 14, modify the obligations of the parties or the way in which the contract is performed? Logically there should be a difference between the ambit of the duty pertaining to the pre-contractual relationship and the post contractual relationship.
35. At common law, for example, although the duty of good faith continued after contract formation, that duty did not require the insured to provide material facts to the insurer even if it might be relevant to the insurer, eg. to determine whether to cancel the contract. However if the insurance policy itself provides for an obligation to supply information to the insurer in certain circumstances, the insured must act in good faith when such circumstances arise, not only unilaterally provide the information in accordance with the contract, and in a complete and accurate way. Such a view, it may be observed, is consistent with what Chesterman J considered was the proper operation of the obligations of good faith in Zurich Insurance.
36. The operation of the implied term of good faith in the post contractual sphere therefore, has some potential important practical operation. Section 14 does not curtail or codify the operation of section 13. The two sections have an independent operation with section 14 being but a particular application of the duty of the implied term of good faith in section 13.
37. Some immediate examples where section 13 might be of some assistance from the point of view of the insurer can be readily identified. One area is the problem of exaggerated claims. Often a claim may be exaggerated but may fall short of being fraudulent keeping in mind the high degree of persuasion necessary to establish fraud. Although a finding of moral turpitude is necessary for a finding of fraud under the ICA, and dishonesty can be a breach of duty of good faith, dishonesty of itself is not a necessary element to constitute a breach of good faith. On the other hand an innocent or negligent mistake will not be enough.
38. Another example, which commonly arises, is if there is an ongoing obligation to supply information, often under income protection or disability policies, after a claim has been made and accepted. The updating of the insurer of the current state of health and finances of the claimant may be incomplete, sometimes exaggerated and sometimes understated.
39. In the post-contractual operation of the obligation of good faith, an appropriate objective test applied to the facts of the particular case to ascertain whether the duty has been breached suggested as being:-
“Would a reasonable person with the subjective knowledge of the insurer, or the insured (as the case may be) take such action.”
40. Such a test would see the good faith operate akin to an overarching norm or standard. If it operated in this fashion it would impose some sort of public policy standard upon the contractual performance of a private bargain. At first blush this would seem a remarkable extension of the principal, and no doubt, with respect Chesterman J thought so as His Honour can plainly be seen to show distaste for a similar definition of good faith proposed by Professor Sutton as referred to above. This type of test might be seen as introducing a concept of commercial unconscionability in an area equity (let alone common law) has not seen fit to enter. With respect, it must be doubted that this was the idea behind section 13 and 14 but as the authorities show there have been some innovative uses of it and until the High Court speaks on the point the struggle between the broad view, which has great capacity for intervention by the Court, and the narrow view will continue.
41. In the post contractual context there are a number of illustrations where the obligation has been deployed against both insurers and insureds.
42. As against the insurer, the following are some examples:-
• The failure of the insurer to notify the insured of the serious consequences of breaching the condition of the policy. In this example a comprehensive policy of motor vehicle insurance contained a condition that the insured not make any modification to the car without the insures written consent. Without consent the insured fitted “mag” wheels. The vehicle was then damaged. The new wheels played no part in causing the collision. Had the insurer been notified of the modification the policy would have been kept on foot but cover would not have been extended unless the person driving the vehicle with the mag wheels was over 25 years of age. The particular collision thus would not have been covered by the policy. The Court found the insurer was in breach of the implied duty in section 13 of the ICA because it had not notified the insured of the consequence of breaching the condition. In Zurich Chesterman J said of this decision:-
“This decision appears to me, with respect, wrong. A duty, the essence of which is to act honestly, is elevated to an obligation in an insurer to coddle its insured and to allow idiosyncratic judicial solicitude to replace principle.”
• Failing to inform the insured of any conditions which are precedent to the insurers liability to pay the claim.
• Failure to advise the insured that the policy which had been obtained did not afford the protection that had been explicitly requested.
• Failure to progress a claim and to make a decision on liability within a reasonable period of time.
• Failure to make a settlement payment on a legitimate claim within a reasonable time. Moss was also disapproved of by Chesterman J in Re Zurich Australian Insurance Ltd. In Moss the Court having found that the insurer was in breach of its obligation to act in good faith by delaying admission of a claim in payment of the indemnity sums held the insurer liable to pay damages for loss of use of the money calculated by reference to compound rates of interest rather than the simple interest rate permitted under section 57 of the ICA. Chesterman J stated in Zurich that if an insurer is liable to pay damages because it paid late that is because there is a term or implied term of the contract that it should pay by a certain date it is not because the term was broken in bad faith.
• Failing to act reasonably and carefully assess the interest of both the insured and the insurer when making a decision to defend rather than settle a claim.
• Failing to consult with and advise the insured or conflict of interest may arise such as where there are basis’s of liability and only one of them is covered by the policy thereby depriving the insured of the opportunity to obtain its advise and be involved for the potentially uninsured component. This is an example which arises not in frequently. Often there is a contractual responsibility exclusion in a broad-from policy. Such a situation arose in Re ACN 007. There the Court held that the insured had been deliberately kept in the dark by the insurer and its advisors who then embarked upon a strategy which was designed to reflect liability away from the liability which was covered by the policy and into an area where there was an exclusion. Not surprisingly, based on these findings, the Court held there had been a gross breach of good faith and specifically attracted the operation of section 14. In consequence the insurer was disentitled from relying upon the relevant contractual exclusion.
• Interestingly it has been suggested that engaging in “horse trading” which is prevalent in claims negotiations seeking to secure a lower figure of payment without a arguable basis for doing so attracts the operation of section 13 and 14.
• Failing to give the insured a opportunity to consider the basis of a proposed exercise of a discretion against the interests of the insured and to put forward submissions and evidence (most cases deal with medical evidence). The operation of the duty of utmost good faith in this regard is most often seen in income protection policies and disabilities policies.
The foregoing list is not exhaustive.
As against the insured, the duty of good faith in the post contractual context has a number of illustrations.
• In light of the problems which the High Court’s decision in FAI General Insurance Co Ltd v. Australian Hospital Care Pty Ltd has caused “claims made and notified policies” it is of interest to note Chesterman J’s suggestion when Hospital Care was in the Court of Appeal that perhaps an insurer in some cases may rely upon section 13 to resist paying where the insured seeks to resolve from a decision not to give a notice of an occurrence in the alternative to section 54. However authority now suggests that section 13 is constrained by section 54 which will be briefly mentioned below. A contrary view appears to have been taken in Einfeld v. HIH where the Court held that an insured who determined, on legal advice, not to notify an insurer of circumstances which may give rise to a claim due to the likely effect on future premiums had not acted in breach of the obligation of good faith.
• Exaggerating a claim or the circumstances of a claim. Mention of this was made above. There may be a number of difficulties lying in the path of an insurer in establishing that a claim was made fraudulently to avail itself for the benefit of section 56 of the ICA. Likewise intentionally withholding information form the insurer when making a claim. Further providing a false (but not fraudulent) answer in a claim form.
• Where there is an ongoing contractual obligation to supply information failing to volunteer the information or to do so completely an accurately.
• It has also been suggested that it would breach good faith for a insured to engage in “horse trading” to settle a claim under a policy.
43. As the obligation of good faith is now an implied term of the contract damages is available as a remedy. Exactly what these damages might consist of is a topic of debate. As observed above Hungerford v. Walker style damages have been awarded for the opportunity cost of delayed payment.
44. More controversially still, there is authority that a breach of good faith entitles damages in tort for hardship anxiety distress and also ongoing economic loss such as an inability to maintain mortgage or hire purchase payments. This appears to be close to recognition of a tort of bad faith which the ALRC recommended against.
45. There may be no reason in principle why breach of an implied term of good faith might not in appropriate circumstances permit termination of the contract or if it is affirmed, permit recovery not only of damages representing the indemnity or amounts covered by the policy but other amounts. Certainly there is general authority for the proposition that in some circumstances there may be damages for hurt feelings, disappointment and frustration arising out of particular types of contracts.
46. Of course, as section 14 contemplates, the duty of good faith might provide a basis for a Court to declare an insurer or an insured is not entitled to rely upon there strict contractual rights and perhaps enjoin a party from exercising such rights, if need be, but damages would have to be an insufficient remedy and the other discretionary considerates would apply.
47. Section 60(1)(a) of the ICA contemplates that in the contract of general insurance if there has been a breached of duty of good faith the insurer may cancel the contract a termination to the future. No equivalent right is given to a life insurer (which includes the policies of income protection and disability insurance). It remains an open question whether such an insurer could elect to terminate a policy in breach of duty of good faith.
(e) SECTIONS 13 AND 54:
48. Section 54 provides:
“54 Insurer may not refuse to pay claims in certain circumstances
(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
(2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.
(3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.
(4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.
(a) the act was necessary to protect the safety of a person or to preserve property; or
(b) it was not reasonably possible for the insured or other person not to do the act;
the insurer may not refuse to pay the claim by reason only of the act.
(6) A reference in this section to an act includes a reference to: (a) an omission; and
(b) an act or omission that has the effect of altering the state or condition of the subject- matter of the contract or of allowing the state or condition of that subject-matter to alter.”
49. If section 13 is subject to section 54 then the insurer could not refuse to pay a claim except to the extent that its interests are prejudiced, even in the case of a breach of section 13 by the insured. The insurer may have to counterclaim for breach of section 13.
50. Moreover, the relationship between section 13 and 54 is important concerning the possibility that breach of the implied term in section 13 might entitle either party, but usually the insurer, to terminate the contract to the future. Section 60(1)(a) contemplates the insurer may do this.
51. In Entwells Pty Ltd v. National General Insurance Co Ltd Ipp J stated:-
“The effect of section 54(1) is that a breach of duty of utmost good faith by the insured entitles the insurer to refuse to indemnify the insured only to the extent that the insurers interests are prejudice by that breach. This view is consistent with the policy embodied in section 56 of the Act. It is unlikely that the legislature intended that a breach of duty of utmost good faith should be dealt with in a way fundamentally different to a fraudulent claim.”
52. In Walton v. The Colonial Mutual Life Assurance Society Ltd Einstein J reviewed the authorities and expressed the view that the construction of Ipp J was correct.
(f) SECTIONS 13, 54 AND 56:
53. Section 56 is set out in paragraph 56 below.
54. In To v. AAMI the Victorian Court of Appeal held that section 56 was the dominant provision, section 54 having no application to cases which fall within section 56. However the Court left open the relationship between section 13 and section 56. As is noted above, there is a category of case, not infrequently occurring, where fraud can not be established because it may depend in part upon subjective considerations, but which may fall within the category of a breach of the duty of utmost good faith. Can the policy be terminated to the future? Does section 54 apply? This is particularly important for life insurers who are not given any express remedy to cancel to the future under section 60. Does such a right exist in light of section 55 which provides:-
“55 No other remedies
The provisions of this Division with respect to an act or omission are exclusive of any right that the insurer has otherwise than under this Act in respect of the act or omission.”
55. In Walton v. Colonial Einstein J rejected an argument that section 56 did not disbar avoidance to the future in a claim which was alleged to be fraudulent, but did not appear to discuss the question of section 13 directly. His Honour’s reasoning appears to accept that section 13 will be subject to section 54. However section 54 only deals with an insurance right to refuse to pay claims in whole or in part, not to cancel the contract. Section 55 of course provides that the provisions of the division (which contains section 54) is the exclusive code of rights of an insurer. Cancellation in Future is dealt with separately in part 7.
D. ICA SECTION 56:
56. Section 56 provides:-
“56 Fraudulent claims
(1) Where a claim under a contract of insurance, or a claim made under this Act against an insurer by a person who is not the insured under a contract of insurance, is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim.
(2) In any proceedings in relation to such a claim, the court may, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair, order the insurer to pay, in relation to the claim, such amount (if any) as is just and equitable in the circumstances.
(3) In exercising the power conferred by subsection (2), the court shall have regard to the need to deter fraudulent conduct in relation to insurance but may also have regard to any other relevant matter.”
57. Mention has already been made of section 56 in the discussion on good faith.
58. At common law the making of a fraudulent claim entitled the insurer, no matter how much of the claim was fraudulent, not only to refuse to pay the claim but also to avoid the contract of insurance from the beginning. Thus, even past accrued valid claims were also vitiated.
59. In To the Victorian Court of Appeal held that section 56 had modified the common law position by removing the right of the insurer to avoid a contract from the beginning but, subject to the Courts discretion to award a payment for insignificant fraud, the legal position remained unaltered and an insurer need not pay the entire amount of the claim whether or not there is an underlying loss which is covered by the policy.
60. A local example can be found in Ricciardi v. Suncorp Metway. In that case Robin DCJ declined to find that the loss was fraudulently induced (arson) but held that the claim had been fraudulently exaggerated. The Plaintiff’s claim was dismissed on this basis. There was an unsuccessful appeal based solely on the question of the operation of section 56(2). The Court reached a like decision as in To. The Court held that whether or not the fraud was deliberate such that it tainted the whole claim, unless section 56(2) operated, the entire claim was forfeited. Indeed Chesterman J commented in the appeal that section 56(2) operated not on the nature or quality of the fraud once found (so if the fraud was only “minor” but tainted the whole claim section 56(2) would not operate) unless the insured could point to a discrete or separate part of the claim which was honestly put forward.
E. ICA SECTIONS 40 AND 54:
61. As noted above the High Court decision in Hospital Care has had a drastic effect on “claims made and notified policies”. Amendments to section 54 have been proposed before Federal Parliament. In the meantime the courts have endeavoured to grapple with the reasoning in the High Court judgment.
62. The operation of section 54 in the post Hospital Care environment was considered in revealing circumstances by McGill SC DCJ in Stapleton v. NTI Limited. This was an “event” not a “claim” based policy. In that case a policy of insurance in respect of a truck had geographically limitations. The prime mover was damaged within 450km of the Plaintiff’s base of operations. However, at the time the accident occurred the prime mover was being operated on a journey where part of its destination was Sydney, obviously a place in excessive of 450km from the base of operations. No part of the loss comprising the damage that gave rise to the claim was caused by the act of taking the truck on a journey which would see it passing the 450km radius. The policy contained a geographical exclusion excluding damage to a vehicle being operated on a journey if part of its destination was in excess of the 450km radius from the base of operation.
63. McGill SC DCJ expressed understandable disquiet at the task which had been assigned to trial judges following Hospital Care to determine whether the exclusion was a exclusion in fact or whether or not is was part of the event insured against. Consistent with Hospital Care, His Honour held that the fact that the limitation appears in an exclusion rather than in the insuring clause was not determinative. The question was whether, having regard to the overall construction of the policy, the limitation formed part of the essential elements of the event which was not subject to section 54 or whether it was an exclusion or limitation or condition which could be subject to section 54. His Honour commented that “how that will operate in a particular case may well be largely a matter of impression”. His Honour held that the identification of a journey as one where no part of its destination was beyond the 450km radius was a necessary part of the event subject of indemnity.
64. His Honour’s approach appears to have been vindicated by the subsequent decision of the New South Wales Court of Appeal in Gosford City Council v. GIO General Limited. In Gosford the question was one of temporal rather than geographical limits. There notification of a claim had to be given by the 31st December, 1991. The Council knew of a potential claim in 1991 but gave no written notice. It is important to note that this was a “claims made” policy which only required that the claim be made within the time of the insurance. It was not a “claims made and notified” provision which required both the claim to be made and notification to be given within the period.
65. The contention of the insured Council was that section 40, which operates on claims made policies as well as claims made notified policies meant that, had a notice been given of the circumstances of the claim within the period of insurance the insured would have been covered because of the provisions of section 40(3). In effect, so the argument ran, the operation of section 40 converted the policy from the claims made to a claims made and notified policy. If that was so then section 54(1) then operated to relieve the insured of the obligation to give the notice and the insurer could not refuse to pay the claim except to the extent of any prejudice.
66. The New South Wales Court of Appeal upheld the trial judges decision rejecting this argument. The trial judge had adopted the judgment of Chesterman J in CA & MEC McNally Nominees Pty Ltd v. HTW Valuers (Brisbane) Pty Ltd where His Honour stated that section 40(3) did not imply under policies a term to the same effect of the subsection and that if it was Parliaments intention that section 54 should modify the operation of section 40(3) one would expect to find some positive indication of that intention.
67. In conclusion, the Court, like McGill SC DCJ in Stapleton, stated that one had to look at the actual claim which was made not one which could hypothetically be made. Hypothetically written notice of claim could have been given within the statutory period provided by section 40(3). But that is not what happened. Hence the occasion for section 40(3) to operate did not occur.
(a) WHO IS THE INSURED?:
68. A common exclusion in a liability policy is that of liability for “injury to an employee of the insured”. Moreover, it is commonly the case that such a policy extends to cover a number of insureds, particularly in a building context, Section 48 of the ICA entitling the non-contracting, but named insureds to recover under the policy. Usually the exclusion is expressed by reference to “the insured”; but which insured? Is it the contracting or otherwise named insured?
69. In a similar context, there may be an exclusion of liability “for damage to property owned by the insured”. Again, which of the insured persons is being identified by such provision?
70. The recent authorities which are pertinent in this respect are Speno Rail Maintenance Australia Pty Ltd v. Hamersley Iron Pty Ltd, WorkCover Queensland v. Royal & Sun Alliance Insurance Australia Ltd and National Vulcan Engineering Insurance Group Limited & Ors v. Transfield & Ors.
71. In National Vulcan the issue in question was whether the claim invoked an exclusion clause 3(b) of the policy in question there, which was a contractors’ floater policy, and which provided for exclusion of liability “for damage to property owned by the Insured”. The ultimate issue was whether the term “Insured”, in the lastmentioned exception, “referred only to the party which has the obligation to make the payment and which will be the party that makes the claim” or to any of the named insureds.
72. Ultimately it was concluded that the exception must be construed from the perspective of the insured who was making the claim but the court undertook a fairly useful discussion, including reference to the other two authorities adverted to above.
73. Santow JA, with whom the other members of the New South Wales Court of Appeal agreed, observed:- “42 There are further reasons which support the trial judge's conclusion. When in clause 1 of section C the Insurers commit "to pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay" as well as defending any claim or suit against the Insured to recover damages, one would expect the words "the Insured" to have the same meaning in section C when it comes to stating exclusions, namely the Insured who claims under the policy. Indeed clause 3(a) also logically must operate on that basis when it excludes "bodily or personal injuries sustained by any person ... in the course of his employment by the Insured". Here, there is no need for any stretch of the imagination to envisage circumstances where employees of the Insured would claim under the policy but for the exclusion in clause 3(a). 43 Thus as each of exclusions 3(a) and (b) operate as an exception to the cover provided by section C, each must be construed in the same manner; Stolberg v Pearl Assurance Co Ltd (1971) 19 DLR(3d) 343 at 346-7; Weightman v Noosa Shire Council  QSC 368 at  Ambrose J. 44 Similarly, the "liability" in relation to which exclusion 3(a) and 3(b) operates is and can only be the liability of the particular insured entity which makes a claim under section C. 45 Further, to construe "the Insured" in Exclusion 3(b) as meaning "any of the insured entities" is inconsistent with: (a) the use of the definite article; (b) the use elsewhere in the Policy of different language where it is intended to refer to insured entities generally or any one or all insured entities: · "any party insured under this Policy" (General Condition 2(c)) [White, 110]; · "all other parties insured" (General Condition 2(c)) [White, 110]; · "any of the Insureds" (General Condition 5) [White, 100-111]; · "additional Insureds" (General Condition 6) [White, 111]; · "each of the persons comprising the Insured" (General Condition 10) [White, 111]; · "any Insured" (General Condition 11) [White 112]; · "any other of the Insured" (General Condition 11) [White, 112]; · "Transfield holdings Pty Limited and/or any other named Insured" (Endorsement 2(a) [White, 113]; and · "the Insured parties" (Endorsement 2) [White, 114]. 46 Moreover, the term "Insured" is defined on page 1 of the Policy [White, 87] in the following terms: "Exben Pty Ltd, Transfield Holdings Pty Ltd and all subsidiary and controlled and Joint Venture companies, and their sub- contractors and all principals as they may appear and all other interested parties as may be required, for their respective rights, interests and liabilities (as more detailed in the attached schedule)." [emphasis added] 47 Where more than one person is insured "for their respective rights, interests and liabilities", the policy is a composite policy, not a joint policy: Federation Insurance Ltd v Wasson (1987) 163 CLR 303 at 309-311; Generals Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd  2 KB 388 at 406-408 (Court of Appeal). 48 In the case of liability insurance, such words mean that, of the named insured entities, the insured entity whose interest is involved in a particular claim, is the insured in respect of it. This is equivalent to saying that the person who seeks the indemnity is the insured in respect of that particular claim: Stolberg v Pearl Assurance Co ltd (supra) at 346 (Supreme court of Canada); Re FAI General Insurance Co Ltd & Fletcher Construction Ltd (1998) 10 ANZ Ins Cas 61-403 at 74,430 (White J). 49 Furthermore, construing Exclusion 3(b) as referring only to the insured entity which makes the particular claim is expressly reinforced by General Condition 10 [White, 111-112], which provides: "CROSS LIABILITY Each of the persons comprising the Insured shall for the purposes of this policy be considered as a separate and distinct unit and the words "the Insured" shall be considered as applying to each of such persons in the same manner as if a separate policy had been issued to each of them in his name alone and the insurers waive all rights of subrogation or action which they may have or acquire against any of such persons. Provided that nothing in this clause shall be deemed to increase the limit of the Insurers' liability under its policy in respect of any one occurrence." [emphasis added] See also Endorsement No. 7 [White, 116]. 50 Had a separate policy been issued to Transfield in its name alone, there would be no basis for contending that the reference in Exclusion 3(b) to "property owned by the Insured" meant anything other than property owned by Transfield. 51 A two step approach to construing an exclusion such as Exclusion 3(b) in light of the Cross Liability clause has been enunciated by the Full Court of the Supreme Court of Western Australia in Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291 at 321-324 especially at paragraph  per Wheeler J, with whom Malcolm CJ (at 300) and Ipp J (at 310) agreed. That two-step approach is as follows:
(i) first, the prima facie effect of the "Cross Liability" clause requires the reference to the "Insured" in the exclusion clause to be read as a reference only to the insured entity making the particular claim; but (ii) secondly, one then asks whether there is anything in the wording, nature or context of Exclusion 3(b) which requires it to be read in some other way. 52 For the reasons stated above, the wording, nature and context of Exclusion 3(b) requires the reference to "the Insured" to be read in accordance with the prima facie meaning, namely the insured entity making the particular claim. There is nothing in the wording which requires it to be read in some other way. 53 It was put that if there were any doubt as to the construction of Exclusion 3(b), it must be resolved against the Insurers: see for example CE Heath Underwriting & Insurance (Aust) Pty Ltd v Edwards Dunlop & Co Ltd (1993) 176 CLR 535 at 541-542 (Deane J). However, that contra proferentem principle cannot be invoked where one has no evidence as to whether the insurer or the insured were the proferens; Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR(NSW) 231 at 233. But that argument is not needed in support of the trial judge's construction of the exclusion. 54 The appellants refer to cases which they cite as supporting the construction that the exclusion in 3(b) must refer to all those entities or persons covered by the definition of "Insured". The first of these, a Canadian case Romay Automotive Ltd v Dominion of Canada General Insurance Co (1974) 43 DLR(3d) 346 was a case of a liability insurance policy in which only two persons were named as insured. The policy contained an exclusion of the insurer's liability in respect of damage to property owned by "the Insured". One insured negligently damaged the property of the other. The Insurer was held by the Ontario High Court to be able to rely on the exclusion. The Court reached its conclusion by reference to the word "Insured" as defined by the policy. 55 An immediate difficulty in relying upon this case is the fact that there were only two entities covered by the insurance clause as the Insured and there was no cross-liability clause as indeed was expressly noted at 352-3. The context was very different from a project master policy of this kind. Similar comment can be made in regard to the case Re Vergata et al v Manitoba Public Insurance Corporation (1976) 67 DLR(3d) 527. It concerned an exclusion of the liability in connection with the death of "the Insured" where the court held that it was the intention to exclude liability to an Insured with respect to a claim by the contracting Insured against one to whom the cover extended. 56 Putting to one side other Canadian cases to similar effect, the case which most assists the appellants is WorkCover Queensland v Royal & Sun Alliance Insurance Australia Ltd (2001) 11 ANZ Ins-Cas 61-489. 57 That decision by Wilson J in the Supreme Court of Queensland involved a determination as to whom the expression "the Insured" referred in circumstances where the "sub-contractor clause" and "cross-liability clause" were identical in their terms. 58 The facts were as follows: 59 BMC, the head contractor, had public liability insurance which defined "the insured" to include it and its subcontractors. An employee of one of the sub-contractors injured himself. The policy excluded claims for injury sustained by any person in the course of his employment of the insured. The policy contained a cross-liability clause. The question for the court was whether the insurer had an obligation to indemnify BMC (which was not the employer) or whether the insurer could rely on the exclusion which excluded cover for injury sustained by any person arising out of the course of employment by the insured. The court held, in circumstances where it was clear that the injury was suffered by an employee of a sub-contractor, the exclusion should be construed as excluding liability for injury in the course of employment by "any one of the insured" (p75-657). The court reached this conclusion by reference to clause 7 of the policy which included sub-contractors in the expression "the Insured" in equivalent terms to the wording of clause 7 of Transfield's policy. 60 The decision in this case did not involve a complex project with not only sub-contractors but also a large range of other State and Commonwealth Government entities including the Commonwealth of Australia. One might envisage circumstances in which a head contractor might take out insurance which did not cover claims against it in respect of either its employees or its sub-contractor's employees. That said, to the extent that the reasoning in the WorkCover decision is inconsistent with the reasoning adopted by McClellan J and elaborated in these reasons, and taking into account particularly the reasoning which placed such importance on the cross-liability clause in Speno Rail Maintenance Australia Pty Limited (supra) I am persuaded that I should not follow the WorkCover case.” (emphasis added)
(b) CHARACTERISING THE SUBJECT OF INDEMNITY:
74. In Allianz Australia Finance Ltd v. Wentworthville Real Estate Pty Ltd (trading as Starr Partners Wentworthville) the respondent insured, Starr Partners, held a policy with the appellant insurer, Allianz, which was a “claims made” professional indemnity policy, under which the insurer agreed to indemnify the insured against legal liability from a “claim” first made against it during the period of cover and reported to the insurer during that period in respect of any civil liability howsoever incurred in the course of Starr Partner’s profession as real estate agents. Liability was denied on the basis of an exclusion (k) which stated:-
“Except as expressly provided for in the extensions, this Policy shall not indemnify the Insured in respect of any claim against the Insured:
k) for any alleged or actual bodily injury or property damage …”.
75. A document headed “Important Notes”, being attached to a proposal form signed by Starr Partners, and presented to it for execution by the insurer’s agent, provided:-
“The policy will NOT cover you for any liability involving bodily injury or property damage – public liability insurance should be arranged to cover this risk which may be in exposure if you manage property for others.”
76. Starr Partners managed a rental property for Mr and Mrs Khoury. A tenant of the property, Mr Hudson, sued the Khourys in negligence after he fell in the shower and cut himself on the glass screen. In 1998 he Khourys joined Starr Partners as a third party, claiming statutory tortfeasor contribution and damages for breach of the management contract. Hudson’s claim was settled in 2000 with the Khourys and Starr Partners agreeing to pay half of the agreed sum of damages contemporaneously Starr Partners was joined as a defendant to Hudson’s proceeding.
77. In the proceeding, the subject of appeal, Starr Partners claimed against Allianz under the policy. Either by reference to the terms of exclusion (k) or the content of the “Important Notes”, the appellant Allianz sought to avoid indemnity. Each argument was unsuccessful.
78. The opening submissions of the insurer proved attractive to the court. Mason P (with whom Shellar JA and Pearlman AJA agreed) rehearsed:-
“ The learned judge then turned to the characterisation of the claims brought by the Khourys against Starr Partners. He observed that there were two claims brought, each of quite a different character to the other. The first (in point of time) was the claim for contribution under s 5 of the 1946 Act. The second was a claim in contract, "admittedly arising out of bodily injuries suffered by a tenant of the Khourys but nevertheless a claim in relation to a breach of the management agreement".  The judge held that neither of these claims fell into the category of a claim "for bodily injury" if a narrow and literal view of those words was taken. His Honour saw no reason to read the words expansively, they being part of an exclusion in a policy that offers extensive cover for professional liability. If it were necessary to resort to the contra proferentem principle, this presented further difficulty for Allianz. The insurer's contentions based upon the proposal and the circumstances surrounding entry into the insurance contract were also rejected.  In this Court, the appellant insurer submits that the primary judge erred in characterising the claim against Starr Partners as two claims, according to the two causes of action eventually pleaded in the Amended Cross Claim by the Khourys against Starr Partners.  It is submitted that the court must look at the substance of the claim, not the legal tag or tags which may be attached to it to signify the cause(s) of action, to determine whether the claim attracts indemnity under the policy. The manner in which a claim is framed against the insured will not be decisive as to whether liability falls within cover.  This legal proposition should be accepted. It is supported by the authorities cited by the appellant (see West Wake Price & Co v Ching  1 WLR 45 at 55–6; Elders Ltd v Swinbank  FCA 798 at -, State of New South Wales v AXA Insurance Australia Ltd  NSWCA 63. See generally Nigel G Rein, “Liability Policies: The Relationship of the Claim against the Insured and the Insured’s Claim on the Insurer” (1994) 6 Ins LJ 193). The primary judge did not overlook these principles when he explained why the claim fell outside the exclusion even if one considered each of the legal bases upon which it was ultimately pleaded in the Khoury’s Cross Claim.  The appellant is also correct to observe in its written submissions (para 15) that a purely literal meaning cannot be given to Exclusion (k) because, strictly speaking, no claim is ever for bodily injury. The exclusion must be taken to be referring to a claim for compensation for bodily injury for which the person against whom the claim is made has legal responsibility.  But at this point the appellant’s submissions run into the sand.”
79. Allianz then landed in difficulty. The court thought indistinguishable the language in Unsworth v. Commissioner for Railways, where it was held that a claim for statutory tortfeasor contribution was not a claim “to recover damages or compensation in respect of personal injury” within the meaning of Section 121 of the Railways Act 1914 (Qld) which capped damages recoverable for personal injury resulting in death. In broad terms, to like effect, was Rolls Royce Industrial Power (Pacific) Ltd v. James Hardie & Co Pty Ltd. The court distinguished the language utilised in statutory policy context decided in Genders v. GIO and GIO v. Crittenden.
80. The court observed:-
“ There is obviously a distinction between an action (or cause of action) and a claim. But it has no bearing on the present issue. The Policy offers indemnity against “legal liability for … claims” having a particular character. The word “liability” will have different denotations, depending on context, but is core meaning is that of legal liability (see Orica Ltd v CGU Insurance Ltd  NSWCA 331 at - per Spigelman CJ, - per Mason P). The Policy refers to “legal liability for claims” in the Insuring Clause. The claim made against the Khourys in May 1998 and promptly notified by them to their insurer was of this nature.  When one turns to Exclusion (k) the same type of “claim” is being addressed. The inquiry becomes whether that claim has an additional character, namely whether it is “for any alleged or actual bodily harm”.  The reasoning in Unsworth, Nickels and Rolls Royce offers a compelling analogy with regard to this latter characterisation issue.  Rein DCJ observed that cases like Genders and Crittenden were distinguishable because they deal with legislative contexts where a more expansive approach was indicated. His Honour was correct in this (see also Rolls Royce at , set out above).
 The appellant's submission fails to grapple adequately with the context of the exclusion itself. One is dealing with a claims made and notified policy where the focus of attention is the position of the insured. The claim made on the insured in 1998 and notified by the insured in 1998 was a claim by the Khourys for contribution or indemnity against the burden of a separate claim made upon them by Mr Hudson.  The circumstances in which Starr Partners were joined as the defendant in Mr Hudson's action did not change this. Here, the line of cases relied upon by the appellant actually harms its position. Those cases emphasise the need to look at the substance of the claim in the context of deciding whether the policy responds. The Exclusion expressly focuses upon the claim "against the Insured" and requires consideration of the character of that claim. If it is a claim "for any alleged or actual bodily injury" there is no indemnity.  The joinder of Starr Partners as a defendant in the 1997 proceedings was made for the first time as the Terms of Settlement were being formulated on 21 August 2000. It was a convenient way of effecting apportionment as between two parties each of whom had the undoubted capacity to meet Mr Hudson's agreed damages. Mr Hudson had no need to assert or prove a cause of action directly against Starr Partners, and he never amended his pleading to do so. True it is that the Khourys' claim for contribution under the 1946 Act proceeded on the basis that Starr Partners was a tortfeasor who would if sued be liable to Hudson. In one sense, the joinder of Starr Partners as a defendant and the entry of a verdict against it made the managing agent a "tortfeasor liable" (cf James Hardie & Coy Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53). But the substantial character of the claim that had been notified two years earlier did not change by reason of the way that the Terms of Settlement were cast.  A claim by Mr Hudson upon Starr Partners in 2000 would have been outside the Policy if only because it was made outside the period of cover. But this was not the basis upon which the insurer sought to avoid liability, not that I am implying that it would have succeeded had it done so. The claim that Starr Partners notified in 1998 remained outside the Exclusion because it remained one for contribution/indemnity against the economic loss of the Khourys' meeting Mr Hudson's claim. Mr Hudson's claim against the Khourys was for bodily injury, but the Khourys' claim against Starr Partners, however formulated, was not of that character.” (emphasis added)
81. The court emphatically rejected the “Important Notes” argument:- “ The insurer points to the phrase “involving bodily injury or property damage” (emphasis added) and submits that this is arguably a more liberal connector than “for … bodily injury or property damage” in Exclusion (k). The analogous reasoning in Genders and Crittenden is thus invoked afresh.  This contention strikes me as an attempt by the insurer to rely upon its agent’s representation as to the effect of the policy to defeat the terms of the Policy itself. In other contexts, this might be misleading or deceptive conduct within the ambit of s 52 of the Trade Practices Act 1987 (Cth). The contention becomes even less attractive when linked to a submission that there were possibly two different policies, one being the Policy issued, the other being an earlier, inconsistent contract formed upon acceptance of the premium (whose terms were to be drawn from the notes on the proposal and invoice, read with the insurer’s “usual” Policy conditions but capable of overriding them if inconsistent). The insurer cited Randelll v Atlantic Insurance Co Ltd (1985) 80 FLR 253 at 267, Goodwin v State Government Insurance Office (Qld) (1991) 6 ANZ Ins Cas ¶61-064 at p 77,167 and Shepherd v National Mutual Life Assn of Australasia Ltd (1995) 8 ANZ Ins Cas ¶61-233 at p 75, 615.  As it turns out, the insurer’s invocation of the “IMPORTANT NOTE” does not avail it as a means of reading up Exclusion (k), for several reasons. First, the stipulation is no more than what it purports to be, namely a “NOTE” from the insurer’s agent that purports to draw attention to a gap in the Policy. Indeed the “NOTE” is accurate in so far as Exclusion (k) has work to do in relation to an estate agent. One can hypothesise situations involving visitors to the premises of the agent who injure themselves due to the state of the agent’s premises. Claims upon the agent emanating from such persons would definitely be excluded from the Policy, due to Exclusion (k). Non sequitur that Exclusion (k) is to be interpreted otherwise than according to its own terms.  Secondly, there is nothing to make the “IMPORTANT NOTE” a term of the Policy. In terms, it merely draws the would-be insured’s attention to a particular state of affairs. It is a representation made by the insurer’s agent in the transaction. It does not purport to modify or even interpret the Policy.  Thirdly, the insurer’s attempt to incorporate the NOTE though the Policy’s Preamble fails as a matter of plain construction. Relevantly, that Preamble states: Whereas the Insured, (as defined in this Policy and named in the Certificate of Insurance) has made to MMI General insurance Limited (ACN 000 122 850) (“the Company”), a written proposal containing particulars and statements which it is agreed are the basis of the contract and are to be considered as incorporated into the contract … .  This purports to make the Insured’s “particulars and statements” in the written proposal the basis of the contract of insurance and to incorporate them into that contract. These “particulars and statements” include information provided by the insured, including information that is to be read with portions of printed forms on which it is provided. But by no stretch of the imagination could they include information provided on behalf of the insurer that, at the highest, the insured “notes”.  Fourthly, the submission founders by application of the contra proferentem principle (McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 602). At best for the insurer, the language of the NOTE is ambiguous in its impact upon the sharper wording of Exclusion (k). There is nothing to show why such ambiguity should be resolved in the insurer’s favour.”
(c) FROM WHERE DID THAT WATER COME?:
82. There have been a raft of cases in recent years involving the attempt by insurers to invoke, in the case of water damage, an exclusion where the proximate cause of loss is “flood”, usually defined by reference to “inundation from escape of water from a watercourse” or like language.
83. In Hams Einstein J, of the New South Wales Supreme Court usefully summarised the principles pertaining to causation in dealing with such an exclusion:-
“ The parties are agreed that this Court is bound as a matter of stare decisis to accept the following as the relevant principles which are to be applied: • If a loss has two or more proximate or effective causes and at least one cause is excluded from cover the insurer is not liable: Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corp Ltd  QB 57; Petersen v Union des Assurances de Paris IARD (1997) 9 ANZ Ins Cases ¶61-366 ("the Wayne Tank principle"). • If a loss has two or more causes, and loss from one is insured against and none of the others is expressly excluded, the insured is entitled to recover: HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 612B. …  Clearly enough the critical causal question is whether the damage was caused by "inundation following the escape of water...". I accept that the question of causation is to be determined by the commonsense evaluation of the relevant facts. I further accept that the last causal event to occur will usually be an effective contributing cause, especially where it has a cumulative and independent origin: Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd  AC 350; National & General Insurance Co Ltd v Chick  2 NSWLR 86 at 97; City Centre Cold Store Pty Ltd v Preservatrice Scandia Insurance Ltd (1985) 3 NSWLR 739 at 744-745; Petersen v Union des Assurances de Paris IARD (1995) ANZ Ins Cases 61-244 at 75249, (1997) 9 ANZ Ins Cases 61-366 at 77034.  I further accept that causation, including the identification of a "proximate cause" is not a binary analysis. Clearly multiple causes may contribute effectively to the loss- and if one is excluded the policy does not respond: Petersen at 75749; Wayne Tank v Employer's Liability Insurance (1974) QB 57; City Centre Cold Store at 744; Sutton on Insurance at law in Australia (3rd ed, para15.10).”
84. The issue usually involved in the “flood” cases is whether the proximate cause of the damage to the insured property is the inundation caused by storm water as opposed to flood water from any creek or other watercourse.
85. In Eastern Suburbs Leagues Club Ltd v. Royal & Sun Alliance Insurance Australia Ltd, Mackenzie J dealt with a policy providing for indemnity against damage occurring to property insured but subject to an exclusion in respect of damage to any property insured “caused or occasioned through … flood …”.
86. His Honour observed:-
“ It is convenient now to address the relevant parts of the policy under which the plaintiff’s claim is made. By virtue of clause 2 and clause 2.5 the policy provides that the insurer will indemnify the insured against damage occurring to property insured, subject to the damage not occurring in circumstances which are excluded by clause 6. Clause 6.2 provides that section 1 of the policy (which includes clause 2) does not cover damage to any property insured:
“…caused by or occasioned through; … 6.2.3 Flood; ... Provided that the Insurer will indemnify the Insured for any Damage to Property Insured caused directly by any circumstances not excluded under Section 1 of this Policy, notwithstanding that these circumstances may in turn have been caused by any of the circumstances referred to in Exclusions 6.2.1 to 6.2.16.” “Flood” is defined in clause 1.14 as follows: “Flood means the inundation of normally dry land by water escaping from or released from the normal confines of any natural watercourse …”
 It was submitted on behalf of the defendant that the words commencing with “provided” in clause 6.2 were an exception to an exclusion. As such the onus lay on the plaintiff to show that the loss was proximately caused by one of the perils falling within the exception to the exclusion. On the other hand, it was submitted for the plaintiff that the defendant bore the onus of proving that loss to the plaintiff was caused by an excluded event.  The effect of the words commencing with “provided” is that the insurer will indemnify the insured if a non-excluded event is the primary cause of the loss, but it was in turn caused by an excluded event. In the context of this case the proposition would be that the damage caused directly by entry of water into the club was not a flood but that its entry was in turn caused by flood. Whether the words have any application to the case will depend on characterisation of what the evidence establishes to have happened. The Legal Framework  The first submission, rather ambitiously made, on behalf of the plaintiff was that the proximate cause of the inundation was rain. As it was expressed in the plaintiff’s counsel’s address:
“… our primary position is that whatever view is taken of interaction between stormwater and creek water on the night in question the real cause of the inundation of the club was the rain, unusual storm. The rain fell to earth, it descended upon the club in different directions, some as local catchment water, some as entering the creek and then coming back towards the club. But either way, it was the highly unusual, one in a hundred year storm which produced both manifestations and both lots of water bearing upon the club. In our submission, the proximate cause was the rain, not the creek.”
 I do not accept that proposition, which sought to gain support from Petersen & Shadomill Pty Ltd v Union des Assurances de Paris IARD (1997) 9 ANZ Ins Cas 61-366. The findings of fact set out below lead to that result. The policy in that case provided that loss and damage caused by water was covered, subject to an exclusion of loss and damage caused by flooding. An exception from the definition of general flooding related to flooding from drains, which was interpreted as meaning that loss and damage from that source alone was recoverable under the exception (77-304). The appellant failed to prove that a significant part of the water that inundated the premises had not come from elsewhere than a drain.  In the alternative the plaintiff in the present case submitted that it was a case of flooding by stormwater. It was submitted that the water actually escaping from Norman Creek must inundate the insurer’s premises and thereby cause the loss if the flood exclusion is to apply. It was submitted that, for the flood exclusion to apply, it was not enough that water escaping from Norman Creek acted as an impediment to stormwater runoff, preventing it from getting away from the club’s building thereby leading to a rise in the level of stormwater ponding around the club house and eventual inundation by the stormwater. In anticipation of the defendant’s reliance on Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541, it was submitted that that authority was distinguishable because there was, in that case, no provision in the policy corresponding to the proviso.  It was submitted that Mahoney JA in Provincial Insurance had held that loss was “occasioned by or happened through“ the inundation of normally dry land by water escaping from a watercourse in circumstances where, by reason of the inundation of normally dry land by water escaping from a watercourse, other water was forced into the insured’s premises and caused loss. The distinction in the present case was said to lie in the proviso because the direct cause of the loss would be the “other water” which entered the insured’s premises, not the floodwater. Therefore the loss would not have been caused directly by a circumstance not excluded under section 1 of the policy since the inundation was inundation by stormwater. The flood exclusion would not apply notwithstanding that the stormwater was forced into the insured’s premises by the inundation of normally dry land by water escaping from the creek.  It was further submitted that if the initial inundation of the clubhouse was by stormwater and that in itself was sufficient to cause the damage, it did not matter that water escaping from the creek subsequently entered the clubhouse. It was asserted, correctly, that there was ultimately no dispute that the initial inundation, from whatever cause, caused the damage by reason of the location of the property damaged, although the actual extent of damage was contentious. …
 As previously mentioned the defendant submitted that the words quoted from clause 6.2 commencing with “provided” had no application to the present case since the direct cause of loss was inundation of ordinarily dry land by the escape of water from Norman Creek. It was therefore unnecessary to engage in analysis of whether the inundation by runoff water was “in turn” caused by flood. In this connection, the defendant relied on Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd  QB 57; Elilade Pty Ltd v Nonpareil Pty Ltd (2002) 124 FCR 1, Hams v CGU Insurance Ltd, and Petersen & Shadomill Pty Ltd v Union des Assurances de Paris at 77-034 as authority for the principle that where there is more than one proximate cause of damage, one of which entitles the insured to indemnity and the other an exempted event under the policy, there is no obligation on the insurer to indemnify the insured.  Particular reliance was placed on the decision of Angel J in Prosser v AMP General Insurance Ltd  NTSC 80 which, the defendants submitted, was strikingly similar factually to the present case. Angel J made a number of crucial findings, summarised as a conclusion that water that inundated the insured’s property was a combination of accumulated surface water and sinkhole ground water dammed up by flooding in the Katherine River. There were a number of effective or proximate causes of inundation. His ultimate conclusion was expressed as follows:
“ The plaintiffs have established that their loss was caused by an event within the terms of the policy viz. “rain falling naturally from the sky including rainwater run-off over the surface of the land”. The defendant has established a concurrent cause was the Katherine River overflowing its banks both east and west of the plaintiffs’ property trapping the rainwater and groundwater accumulating on the plaintiffs’ property.
 There being concurrent effective or proximate causes, one covered and the other excluded by the policy, the defendant insurer is not liable on the policy: Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd  QB 57; Peterson v Union des Assurances de Paris IARD (1995) 8 ANZ Insurance Cases 61-244; on appeal (1997) ANZ Insurance Cases 61-366 at 77,034; HIH Casualty & General Insurance v Waterwell Shipping (1998) 146 FLR 76 at 83, 84.”
 The principle in Wayne Tank is well established. For the reasons that will be developed shortly, in my judgment the cause of the inundation was influx of water from the creek into the area where there was the existing pond of runoff stormwater which caused water to rise to a level at which the inundation of the club premises occurred. I do not accept that the runoff stormwater and the creek water can be treated as two discrete bodies of water, on the evidence in this case, for the purpose of the proviso. In other words, there is no basis for finding that there was inundation by the runoff water, as a discrete body of water, in turn caused by the flood water blocking its dispersal in a way that would have avoided inundation.  I am satisfied that water from Norman Creek overtopped the ridge in the car park and thereafter contributed to the pond of water to the southern side of the ridge, causing the overall level of water in front of the clubhouse to rise. In that sense there are no sequential causes as envisaged by the proviso. Looked at in a different way, there was one body of water even though intermingling may have been only partial and perhaps quite small by the time the inundation occurred. It is therefore not simply a case where the blocking action of the creek water caused stormwater to continue to build up to a level where it inundated the premises because it could not flow away.”
87. His Honour proceeded to find that the only damage within the policy was to the roof of the building caused by water ingress. After a seven day trial in the Supreme Court, and a reserved judgment, his Honour gave judgment for the plaintiff against the defendant for $17,468. Suffice it to say that was a pyrrhic victory for the plaintiff.
(d) WHEN DID I GET SICK (ICA SECTION 47)?:
88. An exclusion clause arguably invoking a provision of the ICA is Asteron Life Ltd v. Zeiderman. That case concerned a policy described as a “Recovery Insurance” policy but which might otherwise be characterised as a “Trauma” policy.
89. The policy was issued on 9th February 2000 and provided, inter alia, that “We will not pay where certain medical conditions (see s18) … are diagnosed or occur within three months from the issue date in the schedule” (ie. 9th February 2000). Policy section 18 provided:-
“We will not pay: • for cancer if first diagnosed, • for heart attack or stroke if first occurred, or • for coronary artery angioplasty, coronary artery surgery, repair or replacement of aorta, or repair or replacement of valves, if the disease or condition which the surgery is directed is first diagnosed, within three months after the issue date in the schedule or the date of the last reinstatement of this policy (see section 10).”
We will pay for any new and unrelated occurrence of these conditions or procedures (except for Coronary Artery Angioplasty) after this 3 month period.” (emphasis added)
90. The plaintiff insured was diagnosed with cancer on 8th May 2000 (ie, just within three months of policy issue date). The cancer had taken root well prior to issue date but had not been symptomatic before April 2000. The plaintiff insured claimed under the policy but was met with a refusal by the insurer in reliance upon the aforesaid Section 18 exclusion.
91. The insured relied upon Section 47 of the ICA which provided:-
“47 Pre-existing sickness or disability
(1) This section applies where a claim under a contract of insurance is made in respect of a loss that occurred as a result, in whole or in part, of a sickness or disability to which a person was subject or had at any time been subject.
(2) Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into.”
92. The trial judge found in favour of the insured. This finding was overturned on appeal, by majority.
93. Meagher JA, with whom Bergin J agreed, observed:-
“ The learned judge as I have said, held that s 47(2) had the effect of negativing the 3 month exclusion provision, and that therefore Mr Zeiderman was entitled to full payment of the $280,000.00.  His Honour’s judgment is densely reasoned, but on this point is encapsulated in two key paragraphs,  and . In the former paragraph, his Honour said:  We are concerned then with an insured who has contracted a sickness or disability but who is unaware of that fact at the commencement of the policy. … What the exclusion does is exclude cover not for all persons with unknown conditions prior to the commencement of the policy but only for some of them. In my view, the effect of the exclusion remains as one which excludes persons because they unknowingly had the condition before the commencement even though it does not purport to exclude all of them. But this is not an accurate analysis. The two postulated kinds of exclusion (ie precontract pathology and “waiting period” diagnosis) do not have the same effect. A precontract pathology excludes all related claims irrespective of when diagnosis occurs. A “waiting period” exclusion only excludes claims arising out of a diagnosis within the period, and the date of the onset of the underlying pathology is completely irrelevant. The two exclusions are very different.  Paragraph  of his Honour’s judgment is in the following terms:  The effect of the exclusion clause here is that the claim is excluded because it was a pre-existing sickness or disability of a particular type, ie, one diagnosed within three months of commencement of the policy, and in my view where the expressly stated basis of exclusion is a subcategory of the broad category of exclusion which section 47 strikes at, the effect of the exclusion is “by reference to” the broad category.  As Mr Taylor SC, learned senior counsel for the appellant insurer, said: “Even if the limited accuracy of para  was accepted, it provides no justification for para .” Precontract pathology has no logical connection with, and cannot be the cause of, the operation of the waiting period exclusion.  As Mr Taylor SC also said: It follows that the trial judge was wrong to hold that the waiting period exclusion took effect “by reference to” precontract pathology. Whatever, “categorisation” one can contrive, precontract pathology is unarguably and completely irrelevant to the operation of the waiting period exclusion as expressed in the policy wording.  The strength of this submission is, I think, illustrated if one takes a practical example. Assume an insured is not suffering from cancer at the time he takes out his policy, but the cancer arises within the 3 month period (a situation which all parties agreed was possible), and was diagnosed as soon as it arose, it is obvious the policy would exclude the claim, and on any view the statute could not affect that result.”
94. Spigelman CJ, in an attractive dissenting judgment, concluded that a decision in favour of the insurer would be a triumph of form over substance, akin to adoption of drafting techniques eschewed by the High Court in Antico v. Health Fielding Australia Pty Ltd in judicial pronouncements on Section 54 of the ICA.
95. Before addressing his Honour’s reasons it is apt to set out Section 46 of the ICA, upon which he also makes useful comment:-
“46 Pre-existing defect or imperfection
(1) This section applies where a claim under a contract of insurance (other than a contract of insurance that is included in a class of contracts declared by the regulations to be a class of contracts in relation to which this section does not apply) is made in respect of a loss that occurred as a result, in whole or in part, of a defect or imperfection in a thing.
(2) Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to the condition, at a time before the contract was entered into, of the thing.”
96. Spigelman CJ said:- “ Sections 46 and 47 must be construed in the context of the Act as a whole and, in particular, in the context of the substantial amendment of the common law effected by Pt IV of the Act with respect to the consequences of non-disclosure. That Part, the provisions of which it is unnecessary to set out, has the effect that the insurer bears the risk of unknown defects, relevantly, about the health of the person insured at the date of the contract within certain limits that are not material here. Shortly and simply put, there is no non-disclosure, of a character entitling the insurer to avoid meeting his obligations under the contract, in the case of a failure to disclose a sickness or a disability of which the insured was not, and could not reasonably have been, aware.  In the absence of ss 46 and 47, it would have been possible for an insurer to circumvent the impact of Pt IV, by limiting or excluding liability for losses resulting from defects that existed at the time the contract was entered into, whether the insurer was aware of them or not. As the Australian Law Reform Commission recognised in its report, on which this Act is based (Insurance Contracts: ALRC 20), such a contractual provision would have the same effect as a provision requiring the insured to disclose material facts, whether he knew of them or not. The Commission said:  Some absolute warranties of existing fact might be rephrased as exclusions from cover. An example is the common exclusion of pre-existing illness contained in a personal accident policy. This applies to any pre-existing illness, even if the insured was not, and could not reasonably have been, aware of it. Exclusions of that type are as objectionable as analogous warranties. Where exclusion is based on the state or condition or the subject matter of the insurance, the insurer should not be able to rely on that exclusion if the insured proves that, at the time the contract was entered into, he did not know, and a reasonable man in his circumstances would not have known of the existence of the relevant state or condition.  I have set out above the definitions in the policy under consideration of the various medical conditions to which the three month period applies. It can be seen that certain matters are specifically excluded from the list of cancers to which the policy responds: tumours, melanomas below a certain size, other skin cancers, certain other kinds of tumours and prostatic cancers. These are exclusions from the cover of a character which are not, in any way, either expressly or as a matter of substance related to the fact that the sickness or disability was one to which the insured was subject at the time the contract was entered into. They identify insured events to which the policy does not respond at all.  An insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusionary provision of that character does not fall within the statutory preclusion in either s 46 or s 47 of the Act because it could not be said that a limitation or exclusion was made “by reference to” a condition of a thing or a sickness or disability at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, the sections do not apply.  The position in this respect is accurately stated in an example given by David St L Kelly and Michael Ball, Principles of Insurance Law in Australian and New Zealand, Butterworths, Sydney, 1991 at para 6.42, with reference to s 46: Consequently, a provision in a motor vehicle policy excluding liability if the vehicle is unroadworthy at the time of a loss would not be affected, even if the vehicle was also unroadworthy at the time the contract was entered into.  In the present case, however, the exclusion clause contained in the three month limitation period is, in my opinion, of a different character. I have set out above the terms of the exclusion and the definition of the various medical conditions and surgery to which the three months period applies.  The application of the exclusion clause to a heart attack or stroke turns on an “occurrence” rather than a diagnosis. The definitions of heart attack and stroke indicate that, in each case, there is an identifiable event of a character not capable of having occurred at a significantly earlier time, ie before the contract.  In the case of cancer and coronary surgery, however, each turn on the time at which the condition was “first diagnosed”. In the case of cancers the definition is phrased in terms of “the presence of” certain kinds of cancers. In the case of coronary artery angioplasty and coronary artery surgery each is concerned with the date of diagnosis of the “disease or condition which the surgery is directed at”.  If the medical conditions to which the three month period related in the case of a first diagnosis were of a character of which it could be said that their initiating cause may emerge for the first time within a three month period, (compare the occurrence of a heart attack or stroke), then I would have no doubt that it fell into the same category as the other exclusion which I have discussed above, ie the exclusion from the contract of certain kinds of tumours, melanomas, sarcomas and prostatic cancers.  However, a cancer, defined in terms of the presence of one or more of the kinds of cancers identified (or the underlying disease or condition which leads to coronary artery surgery of the kind identified) is ordinarily present over the whole of the period of three months before diagnosis, indeed, other than on a legally irrelevant de minimis basis, is inevitably present. Where a person has chosen a criterion of operation which is inevitably associated with another criterion, the choice of the former satisfies a statutory formulation that that criterion takes effect “with reference to” the latter.  In my opinion, in these circumstances, considered as a matter of substance, the exclusion clause for first diagnosis does answer the statutory description in s 47(2). The limitation or exclusion effected by the three month provision is a limitation or exclusion which operates by reference to – in the sense of is based on — a sickness or disability that existed at the time of the contract. The effect of the exclusion is the same as a provision dealing with misrepresentation and non- disclosure of the character regulated by Pt IV of the Act.  It is relevant that the policy does respond to a pre- existing illness which is diagnosed after the three month waiting period. Accordingly, the exclusion clause does not entirely transfer the risk of pre-existing illness to the insured, as the insurer retained the risk of all pre-existing illness diagnosed beyond the three month waiting period. The insured does bear the risk of latent illness during the three month period. However, the fact that the exclusion does not extend to pre-existing conditions diagnosed after three months, does not prevent the provision being characterised as falling within the formulation in s 47(2). Insofar as the contractual provision has the effect of excluding liability, it falls within the statutory preclusion.  The Appellant relied, alternatively, on the proposition that there was no “loss” within s 47(1) of the Act.  The Appellant submits that the policy responds to a “diagnosis” and no consequent “loss” is required for the policy to respond. It submits that the word “loss”, in its natural and ordinary meaning, does not apply to the mere existence of a sickness or disability, as distinct from some consequence of such a condition. It further submits that the broad reading of the word “loss” in s 47(1) of the character given to it by Rein DCJ, effectively reading it as equivalent to ‘an insured event’, renders s 47(1) otiose.  It is not the experience of the Court that parliamentary draftsmen are so averse to redundancy or repetition that the Court must strain to give independent and separate operation to all the words of a statute. The principle of interpretation that, if possible, all words must be given meaning and effect is a weak principle, if it is to be applied to reach a conclusion that every provision must have some kind of operative effect. The principle is, as Mason CJ put it, “of limited application”. ( Chu Kheng Lim v Minister for Immigration, Local Government and Ethnic Affairs (1992) 176 CLR 1 at 13.1.)  There is an important qualification to the general rule, which O’Connor J identified, with reference to authority: Courts will, however, when necessary take cognisance of the fact that the legislature does sometimes repeat itself, and does not always convey its meaning in the style of literary perfection. (Brisbane City council v Attorney General for Queensland (1908) 5 CLR 695 at 720.)  In the context of the whole of the legislative scheme, particularly the purpose of ss 46 and 47 to prevent avoidance of the Act’s regulation of misrepresentation and non-disclosure, the reference to “loss” in each of ss 46(1) and 47(1) should not be construed to confine the preclusive operation of ss 46(2) and 47(2).  Subsection (1) of each of the two sections identifies the need for a claim to be made, as a precursor to the reliance by the insurer on an exclusion clause, which reliance is precluded by subs (2) of each section. The use of the word “loss” is, in my opinion, merely designed to indicate the circumstances, in accordance with the particular insurance contract under consideration, which can give rise to claims. It is not, in my opinion, employed in the sense suggested in the Appellant’s submissions, to require the identification of a monetary or other disadvantage, over and above the circumstances which cause the policy to respond, prior to the operation of an exclusionary clause precluded by ss 46(2) and 47(2).  In my opinion, s 47 is intended to operate upon provisions of contracts of insurance of a particular character, the scope and effect of which is observable from the terms of the contract of insurance. The section does not turn on the occurrence of additional events for which the contract of insurance does not provide.  Section 47 is concerned with the circumstances in which a policy responds and with circumstances equivalent in their effect to those which, but for the change of the law effected by Pt IV, would entitle an insurer to avoid a policy for reasons of non-disclosure. This concern is best served by ensuring that the provisions of ss 46 and 47 apply in the same range of situations as equivalent non-disclosure provisions would apply. This, in my opinion, extends to the whole of the circumstances in which a policy responds. This purpose is not served by restricting the operation and effect of ss 46 and 47 only to circumstances in which there exists an additional “loss”, other than that provided for in, or presumed to flow from, an event identified in the policy as one which causes the policy to respond.”
97. There are many other cases involving exclusions but hopefully those mentioned will be of assistance in the broad context of construing commercial insurance policies.
R J Douglas SC K F Holyoak ----------------------- See Australian Paper Manufacturers v. American International Underwriters (Australia) Pty Ltd (1994) 1 V.R. 672 at 693-694. Ibid at 690-691 See MGICA Limited v. United City Merchants (Australia) Limited (1986) 4 ANZ Insurance Cas. 74,340 at 74,349, 74,350  See Darlington Futures Ltd v. Delco Australia Pty Ltd (1986) 161 CLR 500 at 510  See Zurich Australian Insurance Ltd and Ors. v. Fruehauf Finance Corporation Pty Ltd. (1993) 7 ANZ Insurance Cas. 78,007 at 78,011  See Alex Kay Pty Ltd v. General Motors Acceptance Corporation and Hardford and Fire Insurance Company (1963) V.R. 458 at 463  see CE Heath Underwriting & Insurance (Aust) Pty Ltd v. Edwards Dunlop & Co Ltd (1993) 176 CLR 535 at 541-542  See MGICA Limited v United City Merchants (Australia) Limited at 74,350  see Kodak (Australasia) Pty Ltd v. Retail Traders’ Mutual Indemnity Insurance Association (1942) 42 SR(NSW) 231 at 233  See Australia and New Zealand Bank Ltd. v. Colonial and Eagle Wharves Ltd (1962) Lloyds Rep. 241 at 255; see also Government Insurance Office of New South Wales v. Council of the City of Penrith (1999) 102 LGERA 102 (NSWCA).  see Investors Compensation Scheme Ltd v. West Bromich Building Society  1 WLR 896; see also GIO v. Penrith County Council at 114 (2000) 203 CLR 579 at  at  –  (1998) 192 CLR 266 at 272 - 276 at    2 AllER 712  at 718   NSWCA, 22nd October 1991   NSWCA 1  (2004) 13 ANZ Ins. Cas. 61-592   NSWSC 123 (Harrison M)   QSC 49 (McMurdo J)  Much depends on the view taken by the Court as to whether the words “utmost good faith” are being used in the popular ordinary sense or in the legal technical sense: see for example Gamer’s Motor Centre (Newcastle) Pty Ltd v. Natwest Wholesalers Australia Pty Ltd (1985) 3 NSWLR 475. Note the discussion as to the correct interpretation of the words “in good faith” in relation to extradition proceedings in Willoughby v. Elande (1985) 59 ALR 147.  (1998) 44 NSWLR 349 at 369.  Sheller JA, Powell and Beazley JJA concurring.  Renard Constructions (ME) Pty Ltd v. Minister for Public Works (1992) 26 NSWLR 234.  Hughes Bros Pty Ltd v. Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91.  At page 369; see also Hughes Aircraft Systems International v. Air Services Australia (1997) 146 ALR 1; Garry Rogers Motors (Aust) Pty Ltd v. Subaru (Aust) Pty Ltd  FCA 903; Burger King Corp v. Hungry Jacks Pty Ltd  NSWCA 187 (special leave granted).  (1992) 26 NSWLR 234 at 266.  Underlining added.  At page 421 paragraph [10.43].   1 Qd R 346 – an unrelated aspect of the decision in Renard was approved by the Court of Appeal in Iezzi Constructions Pty Ltd v. Watkins Pacific (Qld) Pty Ltd  2 Qd R 350.  Snowlife Pty Ltd v. Robina Land Corporation Ltd (No. 2)  1 Qd R 584 at 586-7.   2 Qd R 203 especially at 209-220.  Comunale v. Traders and General Insurance Co. 50CL. 2d 654, 328 P.2d.198 (1958) – “there is an implied covenant of good faith and fair dealing in every contract that neither party will do anything which will injure the right of the other to receive the benefit of the agreement… implied obligations are imposed based upon those principals of fair dealing which enter into every contract.”  At paragraph  see also paragraph . Where His Honour stated that the proposition that the duty to perform a contract in good faith as a general principal of contract law “at once marks a significant point of departure from the common law”.  Indeed, the imposition of the obligation upon the parties (other than by statute as section 13 requires) invites serious consideration as to the basis upon which such an implied term is to be imported. Is it imported on public policy grounds? Is it to be implied because, objectively, that was the will of the parties. In many situations it may be difficult on either basis to suppose that there is any objective reason for thinking that the parties did not intend that, should the time arise, either might be able to rely strictly upon their legal rights: See general the discussion in Byrne & Frew v. Australian Airlines Ltd (1995) 185 CLR 410. Note the consideration of Byrne in the New South Wales Court of Appeal in Burger King Corp v. Hungry Jacks Pty Ltd  NSWCA 187 (special leave to appeal to the High Court has been granted). See also Moneywood Pty Ltd v. Salamon Nominees Pty Ltd (2001) 202 CLR 351.  Kelly v. New Zealand Insurance Company Ltd (1993) 7 ANZ Insurance Cases 61-197 and on appeal (1996) 9 ANZ Insurance Cases 61-317, adopting the Vermeulen v. SIMU Mutual Insurance Association (1997) 4 ANZ Insurance Cases 60-812 at 74987.  Kelly, infra.  Precisely what the learned author had in mind as being “expert” evidence which might be admissible demonstrating a field of expertise or discipline is not necessarily clear from this passage. Presumably the author had in mind the Weal v. Bottom (1966) 40 ALJR 436 type of expert.  Infra.  At paragraph .  Paragraph .  The two authorities were Moss v. Sun Allianz Australia Ltd (1990) 6 ANZ Insurance Cases 60-967 and Australian Associated Motor Insurers v. Ellis (1990) 6 ANZ Insurance Cases 60-957.  At paragraph ; see also paragraph .  At paragraphs  and .  However, section 13 did not avail the insurer in submitting that an insured knew that certain materials were stored in the unit but did not know (the trial judge accepted) that the materials were flammable had not breached the duty of disclosure. The insurer argued that the knowledge of the insured should be constructive knowledge of the flammable nature of the products because a reasonable person could be expected to know that those materials were flammable. The Queensland Court of Appeal rejected the argument. That construction of section 21(1) was to “generous” to the insurer: see CIC Insurance Ltd v. Midaz Pty Ltd (1998) 10 ANZ Insurance Cases 61-394. However there has been a suggestion that section 13 might independently impose a duty upon a corporate insured to make enquiry of its employees for the purpose of discharging the duty of disclosure ( C E Heath Casualty and General Insurance Ltd v. Grey (1993) 32 NSWLR 25 at 39) but it is uncertain how this comment is reconcilable with section 12 of the ICA.  Sections 21, 22, 28 and 29 of the ICA.  Manifest Shipping & Co. Ltd v. Uni-Polaras Insurance Co Ltd (The Star Sea)  2WLR 170; ALRC Report No. 20 at .  GIO Insurance Ltd v. Leighton Contractors Pty Ltd (1985) 9 ANZ Insurance Cases 61-293, citing New South Wales Medical Defence Union Ltd v. Transport Industries Insurance Co Ltd  4 NSWLR 107 at 112 which in turn relied upon The Litson Pride  1 Lloyds Law Reports 437.  AAMI v. Ellis (1990) 54 SASR 61.  ACL v. Hall (1991) 151 FLR 360 (QLDCA).  ACN 007 838 374 Pty Ltd v. Zurich Australia Insurance Ltd (1997) 69 SASR 374; cf CIC Insurance Limited v. Barwan Region Water Authority (1999) 1 VR 683.  Barrett v. State of South Australia (1994) 62 SASR 208.  The Duty of Utmost Good Faith – The Great Unknown of Modern Insurance Law by Kelly Godfrey (2002) 14(1) ILJ 56 at 58.  “A form of commercial morality” see footnote 13 in the article “The Duty of Utmost Good – The Great Unknown of Modern Insurance Law” by Kelly Godfrey, infra at page 58. One may respectfully ask whose version of morality will be applied. Professor Sutton postulates in the test above that there will be some norm or standard which can be gleaned from evidence of an expert or market. However rarely will any such evidence speak with a unified voice. Often it will be left a judge to determine what is the “commercially moral” approach. This will lead to a judge perhaps rewriting the bargain for the parties or as Chesterman J put it (see below) judicial idiosyncratic solicitude to replacing principle. If there is to be some consumer protection power endowed upon the Court it could have been more expressly conferred.  Adopted from a list appearing the article by Kelly Godfrey, infra.  AAMI v. Ellis, infra.  Section 54 would have applied perhaps to reduce the insurers liability to nil.  Bradley v. Essex & Suffolk Accident Indemnity Society  1 KB 415 Chesterman J’s criticism might apply in this regard as well.  Speno Rail Maintenance Australia Pty Ltd v. Hamersley Iron Pty Ltd (2001) 11 ANZ Insurance Cases 61-485. However one would have thought that the policy might be rectified for unilateral mistake on the basis of equitable fraud: see for example Majestic Homes v. Wise  Qd R 225.  Outteridge v. Commonwealth of Australia (unreported Supreme Court Queensland 25th June, 1993) per Ambrose J.  Moss v. Sun Allianz (Aust) Ltd (1990) SASR 145.  At paragraph .  Distillers Co Bio-Chemical (Australia) Pty Ltd v. AJAX Insurance Co Ltd (1974) 130 CLR 1.  Infra.  See also Nigel Watts Fashion Agencies Pty Ltd v. GIO (1995) 8 ANZ Insurance Cases 61-235, which also held that the insurer was estopped by its conduct from declining indemnity.  The Duty of Utmost Good Faith by Kelly Godfrey, infra at page 61.  See for example Beverley v. Tyndall Life Insurance Co Ltd (1999) 10 ANZ Insurance Cases 61-453. See also the detailed consideration of the authorities in this regard in Szuster v. Hest Australia Ltd (unreported District Court of South Australia Herriman J 6th March, 2000).  The possibilities are considered at length in the aforementioned article by Godfrey.  Again the best is not exhaustive.  (2001) 204 CLR 641.  FAI General Insurance Co Ltd v. Australian Hospital Care Pty Ltd (1999) 10 ANZ Insurance Cases 61-445 at paragraph .  His Honour also noted that section 40(3) might avail insurers if they redrew their policies a matter which will be discussed below.  (1999) 10 ANZ Insurance Cases 61-450.  See, for example, the extraordinary decision in GRE Insurance Ltd v. Ormsby (1992) 2 ANZ Insurance Cases 60-452. The Court there held that even though the statement was false, and was known to be false, in support of a claim as the insured had no intention to obtain more money then that which he was already entitled to the insurer was not entitled to claim the claim or terminate the policy. Professor Sutton comments that section 13 probably has the effect of overruling Ormsby.  New Zealand Insurance Co Ltd v. Forbes (1988) 5 ANZ Insurance Cases 60- 871.  A incorrect answer that the driver had not been drinking alcohol: Gugliotto v. Commercial Union Assurance Co of Australia (1992) 7 ANZ Insurance Cases 61-104.  The aforementioned article by Kelly Godfrey at page 64. With respect it is doubtful that the good faith term should be used to enable the Courts to be the moral guardian of the parties in negotiations such as these.  Gibson v. The Parks District Hospital (1991) 26 NSWLR 9.  The prospect of this being applied in contracts of insurance where it is known that the policy proceeds may be used in times of emergency was discussed in The Italia Express  2 Lloyds Law Reports 281; MIM Insurance Pty Ltd v. Kelly (1999) 10 ANZ Insurance Cases 61-420.  (1991) 6 ANZ Insurance Cases 61-059.  At 77, 136.   NSWSC 616.  At paragraph .  (2001) 3 VR 279.  Infra.  His Honour found that there was no fraud involved.  At paragraphs  and .  The very curious section 56(2).  At paragraph .   QDC 466.  Ricciardi v. Suncorp Metway Limited (2001) 11 ANZ Insurance Cases 61- 493.  Per Chesterman J at paragraph .   QDC 204.  At paragraph .  (2003) 56 NSWLR 542 per Sheller JA – special leave to appeal has been sought.  Newcastle City Council v. GIO (1997) 191 CLR 85.  (2001) 166 FLR 271.  (2000) 23 WAR 291 (FC)  (2001) 11 ANZ Ins. Cas. 61-489 (QSC, Wilson J)   NSWCA 327  per Santow JA at   (2004) 13 ANZ Ins. Cas. 61-598  (1958) 101 CLR 73  (2001) 53 NSWLR 626 the reversal of this decision in the High Court in Amaca Pty Ltd v. New South Wales did not affect the relevant reasoning upon which the court relied.  (1959) 102 CLR 363  (1966) 117 CLR 412  see Petersen and Shadomill Pty Ltd v. Union Des Assurances de Paris (1997) 9 ANZ Ins. Cas. 61-366; Hams v. CGU Insurance Ltd (2002) 12 ANZ Ins. Cas. 61-525; Prosser v. AMP General Insurance Ltd  NTSC 80   QSC 413  (2004) 13 ANZ Ins. Cas. 90-120  (1997) 188 CLR 652 at 668-669  per Spigelman CJ at