REFORMING INSURANCE LAW: - Law Commission

here, in that there can be non-disclosure or misrepresentation by the assured under the prudent
assured test only when he knew or ought to have known that the fact withheld or misstated was
relevant to the insurers. Some degree of fraud is to that extent incorporated into the very
definition of the assured’s duties. However, a finding of fraud is not inevitable in every case.
There can only be fraud if the assured: (a) knew of the fact, or at the very least shut his eyes to its
existence; and (b) knew it to be relevant to the insurers; and (c) deliberately chose to withhold or
to misstate it. 152 Knowing a fact but choosing not to disclose it is not fraud if the assured did not
know of its relevance. 153
4.46 In non-disclosure cases requirements (a) and (b) are almost by definition required to
establish non-disclosure in the first place, so that the question of fraud may focus on (c). What is
the position where the assured has disclosed the relevant facts to his broker, but the broker, in the
knowledge that the facts are relevant, has fraudulently withheld them from the insurers. The
point was considered in Permanent Trustee Australia Ltd v FAI General Insurance Company
Ltd, 154 and it was assumed – without the point being decided – that the assured was to be treated
as himself being fraudulent in that scenario. In such a case it seems harsh to describe the assured
himself as having acted fraudulently, but even if that is wrong it may be that the court would
provide relief under s 31.
4.47 In misrepresentation cases only element (b) is part of the definition of misrepresentation.
The assured may make a false statement even though he is unaware that it is false, while at the
same time appreciating that his answer was relevant to the insurers. It follows that there is a
lesser connection between misrepresentation and fraud than there is between non-disclosure and
fraud. The same broker problem arises here as arises with non-disclosure, in the case where the
broker with knowledge of the relevance of a fact transmits a false answer to the insurers.
4.48 The right of avoidance and its limits. Although the right of avoidance for fraud is on the
face of s 28 unlimited, it is subject to what seems to be a controversial limitation in s 31. The
ALRC accepted that avoidance should normally be allowed, but was concerned that in some
cases avoidance would be a disproportionate remedy. The ALRC accordingly recommended 155
that the court should have an ultimate power of adjustment. Section 31 thus provides that a court
may disregard an avoidance and order the insurers to pay some or all of a claim 156 consistently
with what is just and equitable in the circumstances. The section is curiously drafted, and
contains cautions at every step. Payment can be ordered if avoidance would be “harsh and
unfair”; the amount payable has to be “just and equitable in the circumstances”; the insurers must
not have been prejudiced at all or at most only to a minimal or insignificant degree by the
misrepresentation or non-disclosure; the court must have regard to the need to deter fraudulent
conduct in relation to insurance; and the culpability of the assured must be weighed against the
magnitude of the loss that he would suffer if avoidance was permitted. The power has been
151
Derry v Peek (1889) 14 App Cas 337.
152 See, for an example, Muggleston v National Mutual Life Association of Australasia Ltd [2004] NSWSC 913.
153
Australian Casualty and Life Ltd v Hall (1999) 151 FLR 360.
154
(2001) 187 ALR 380 (NSWCA).
155
ALRC 20, para 196.
156
Apart from payment, the avoidance holds good: s 31(4).
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