REFORMING INSURANCE LAW: - Law Commission

Cases other than fraud: damages
4.52 The ALRC recommended that for non-fraudulent claims the insurers should be entitled to
damages based on the contract measure. Accordingly, s 28(3) provides that “the liability of the
insurer in respect of a claim is reduced to the amount that would place the insurer in a position in
which the insurer would have been if the failure [to disclose] had not occurred or the
misrepresentation had not taken place”. The ALRC summarised the contract measure in the
following propositions: 167
(1) where the insurer would not have accepted the risk on any terms at all, its loss is
the total amount of the claim made against it;
(2) where the insurer would have accepted the risk for a different premium, its loss is
the difference between the two premiums; .
(3) where the insurer would have accepted the risk on different terms, its loss is the
difference between the amount for which it would have been liable but for its
statutory entitlement to reduce the claim and the amount for which it would have
been liable under a contract incorporating the different terms.
4.53 Proposition (1) has proved controversial because it entails the suggestion that liability for
the claim under s 28(3) can be reduced to nil, although the insurer will remain liable to repay the
premium to the assured on the basis that the risk would never have been accepted. After a good
deal of vacillation on the point, 168 it is now clear that proposition (1) holds good and that liability
can be reduced to nil if the insurers would never have insured had the full facts been known. 169
Proposition (2) has yet to be tested, and there is a view that the amount of the claim to be paid is
the proportion of the total premium that would have been charged which is represented by the
amount of the premium actually paid, 170 a suggestion at variance with the ALRC’s own rejection
of proportionality. The alternative suggestion 171 that the correct measure is the amount of
additional premium that the assured would have paid on full disclosure, so that the insurers have
to pay the full claim minus that additional premium, is not good law.
4.54 The Australian approach is far from satisfactory. It has generated a mass of confusing and
not particularly logical case law and has left the courts to develop their own principles on the
assessment of damages. 172 Further, as seen below, proportionality is the approach adopted in life
insurance cases. It is also unclear exactly when the premium is to be refunded: the Act is silent
on the point, although it seems to be accepted that the premium is to be refunded in the absence
of fraud. 173 A further problem is that fraudulent assureds may be treated better than non-
167 Cited by Kate Lewins, op cit.
168 The cases are analysed in Mann, paras 28.30.1 to 28.40 and in Sutton, paras 3.140 to 3.142.
169 Sutton, paras 3.142 to 3.145. See in particular: Lindsay v CIC Insurance Limited (1989) 16 NSWLR 673;
Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) ANZ Ins Cas 60-813; Unity Insurance Brokers Pty
Ltd v Rocco Pezzano Pty Ltd (1998) 193 CLR 603; McNeill v O’Kane [2002] QSC 144; GIO General Ltd v Wallace
[2001] NSWCA 299; Anderson v Aon Risk Services Australia Ltd [2004] QSC 049.
170 Lewins, op cit.
171 By Deane J in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606.
172 The same problems have arisen under s 54(3): see infra.
173 Anderson v Aon Risk Services Australia Ltd [2004] QSC 049.
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