REFORMING INSURANCE LAW: - Law Commission

therefore, an assured who uses a broker to place the risk may find that he is guilty of nondisclosure
by reason of facts known to his broker but not known to him, or by reason of the
broker’s knowledge of the relevance of facts to the particular insurer which was not appreciated
by the assured himself.
4.37 As far as the marine market is concerned, the operation of s 19 was considered by the
ALRC in its 2001 Report, but somewhat surprisingly the Report did not address any of the
matters of doubt raised by the English cases which have discussed the section. Instead the ALRC
focused on the decision of Ormiston J in Helicopter Resources Pty Ltd v Sun Alliance Insurance
Ltd, 132 in which it was held that insurers were entitled to avoid a policy by reason of the placing
broker’s failure to disclose the manner in which helicopters were secured and lashed on board
the insured vessel, a fact not known to the broker but which the judge held he ought to have been
aware. The judge went on to find that the broker was in breach of his duty to the assured, which
included an obligation to inform himself of the nature of his client’s business activities. The
ALRC felt that this case placed the broker’s duty too high, and recommended reforming s 19(a)
so that the broker was required to disclose only facts which he actually knew to be material, or
that a reasonable person in the circumstances would know to be material. 133 The ALRC also
recommended that the concluding words of 19(a), requiring the broker to disclose facts which
ought to have been communicated to him but which he did not otherwise know, should be
repealed. This recommendation is a limited one, not the least because if the fact is material and
known to the assured 134 then the broker’s duty to disclose it arises under s 19(b), and s 19(a) is
not engaged at all: the effect of the recommendation would be to retain the duty of disclosure as
far as the insurers are concerned, but to remove the broker’s liability to the assured in
circumstances where the assured had not communicated the true facts to the broker (the issue in
Helicopter Resources). ALRC 16 and ALRC 91 did not recommend any change in the law with
respect to the agency of brokers in the placement process. Following the repeal of the Insurance
Agents and Brokers Act 1984 and its replacement with self-regulation, brokers are governed by a
Code of Practice monitored by the Insurance Brokers’ Compliance Council and by a dispute
resolution mechanism, the Insurance Brokers’ Dispute Facility. The Code deals with consumer
policies and small business policies (defined in terms of the number of employees [no more than
five] and turnover [not exceeding A$350,000]. The Code contemplates that the broker is the
agent of the assured for most purposes, in particular for the placing of cover.
4.38 If there is to be any move to the introduction of a prudent assured test of materiality in the
UK, it is obvious from Permanent Trustee that there are immediate implications for s 19. If it
remains the case that the knowledge of the broker is the knowledge of the assured, then any
assured who uses a broker will be deemed to be aware of facts which are known to the broker but
not to the assured, and he is also to be judged by the standard of a reasonable broker’s
appreciation of the relevance of the facts to the insurers. In short, without reform of s 19 any
move to a prudent assured test would – at least in commercial insurance and reinsurance – be
negatived. There are various solutions to this question: (a) leave the law as it is, so that a
132
Unreported, Supreme Court of Victoria 26 March 1991.
133
ALRC 91, paras 10.30-10.35, 10.96.
134
As will be seen below, ALRC 91 recommended that the test of materiality be altered to that of prudent assured,
but this does not alter the point being made here.
30