Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd P64/1996 [1997] HCATrans 329 (21 October 1997)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No P64 of 1996

B e t w e e n -

UNITY INSURANCE BROKERS PTY LTD

Appellant

and

ROCCO PEZZANO PTY LTD

Respondent

BRENNAN CJ

McHUGH J

GUMMOW J

KIRBY J

HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON TUESDAY, 21 OCTOBER 1997, AT 3.16 PM

Copyright in the High Court of Australia

MR C.J.L. PULLIN, QC: May it please the Court, with MRS D.M. BRADLEY I appear for the appellant. (instructed by Barker Gosling)

MR R.H.B. PRINGLE, QC: May it please your Honours, I appear with my learned friend, MR D.A. DAWES, for the respondent. (instructed by Michael Rennie)

BRENNAN CJ: Yes, Mr Pullin.

MR PULLIN: May it please the Court, this is an appeal against the judgment of the Full Court of the Western Australia Supreme Court dated 30 August 1996. It dismissed our client's appeal against the judgment of Mr Justice Steytler which had been given in favour of the respondents for a sum of just over $1 million. Now, the factual situation which leads to this dispute is one which occurs regularly in the courts. Perhaps it would be safe to say that there is not a year goes by where one does not see this situation developing. The particular facts in this case are set out in our outline of submission, but they can be further summarised in this way.

A person has an insurance policy and a peril which is insured against occurs. The insured suffers a loss. The insured makes a claim. The underwriter makes some inquiries and then denies liability on the basis that it alleges that there was non-disclosure of material facts. The insured then sues the underwriter. The underwriter having raised this defence, the insured then for good measure and as a long backstop joins the broker because if it be found that there was non-disclosure of material facts, the insured alleges that this was due to the negligence of the broker.

Now, in this case - and you get both of these situations arising. In fact we have two cases in our list of authorities on both sets of facts. The insured sometimes fights it out in the court and there is a trial where there is a decision made by the court about whether or not the insurer is correct in its defence, makes out its defence or not. If it does make out its defence then, of course, attention switches to the broker. If it does not make out its defence, then that is the end of the case against the broker.

In this case - and this occurs sometimes - the insured before it gets to trial thinks that it might face some liability, makes an offer of settlement and a settlement occurs and the insured then pursues the action against the broker seeking to make up the shortfall between what it said it should have got under the policy and the amount of the settlement. In this case the outline - - -

KIRBY J: What happens in practice normally? Is there not an endeavour to get agreement between the insured and the broker that settlement at this level will be taken as reasonable as between them? That would normally happen, would it not?

MR PULLIN: It would certainly be a good idea. In this case the trial judge noted that there had not been any consultation at all with the broker and, in fact, he said he was troubled by the fact that there had not been a reference to the broker of the amount of the settlement and he actually commented on it and addressed that issue, but certainly it did not happen in this case.

KIRBY J: That would be unusual in my experience.

MR PULLIN: Well, it would certainly be something that the insured should do if it wants to avoid what we say was necessary in this case, which was then, if they do not get the agreement, you have to go on and run the case that would have been run against you by the insurer. Now, in this case if NZI had admitted liability in full it would have paid out $1.7 million. Instead it made an offer of $900,000 and this was accepted and then the action went on against the broker.

It is also relevant to point out that when the insured and the underwriter were negotiating the position had been reached where the underwriter was offering as a defence the fact that there had been non-disclosure of material facts. It had also pleaded arson, although it had not pleaded arson in the first case, although the evidence reveals that the insured was well aware that arson was being investigated and at the hearing of the mediation conference the underwriter also said, "We have a draft defence here which will raise the question of the averaging provisions and the effect it will have and if we do not settle, we will plead that as well."

The chronology that we filed is slightly inaccurate because the short chronology shows in the second-last item, it suggests that in March 1993 NZI filed the defence alleging arson and material non-disclosure. In fact, one should cross out "arson and" in that item. The defence filed at that stage was simply one of material non-disclosure, but there is a note made there that at appeal book page 75 we know that NZI did amend to plead arson before settlement and, in fact, was investigating arson at some earlier stage. Now, this appeal concerns the issue of causation primarily.

KIRBY J: Are we concerned with the issue of arson?

MR PULLIN: No. Well, only as an incidental matter, not whether or not there was arson. We did not seek to establish that there was arson committed or not, but it hovers around because the question is, "What was it that the insurer was thinking when it offered $900,000?" We never had any evidence at all about what was in the insurer's mind. The trial judge, we say, made the error of concentrating entirely on what motivated the plaintiff insured, that is the respondent in this case, to settle at $900,000. So one does not know what motivated the insurer and it may have been that it thought that it had strong evidence on arson, but it was a 50:50 case and a hopeless case on non-disclosure. We do not know. It might have thought it had a good case 50:50 chance on non-disclosure, a bad case in relation to the arson plea. So we do not know the evidence the insurer had and what motivated it to offer the $900,000.

Now, before I go to the issues as between the broker and the respondent, I would like to just restate the position as between the insured, the respondent, and the underwriter because the law has, of course, changed and I know several members of this Bench have been involved in cases where the Insurance Contracts Act provision has been dealt with. Others may not have been involved in such a case. Under the common law once an underwriter discovered that there had been non-disclosure of material facts, providing the facts would have been regarded as material to a prudent underwriter, then the underwriter was entitled to avoid liability and if there had to be a trial, the issue was, "What would a prudent insurer regard these facts as being? Were they material or not?" and that would be the issue.

The Insurance Contracts Act, which was passed in 1984, changed this and established a code in place of the common law and the Advance Insurance Agencies v Matthew's Case has held that this is the case and that is - do the members of the Court have the volumes of cases that we made available? I am sorry to say that the - - -

BRENNAN CJ: It would seem so. Yes.

MR PULLIN: Thank you, your Honour. It seems that the list that was sent down originally had a number. The index to this bundle is in alphabetical form. If the index at the front of the bundle of cases is used, I will give a reference to the letter rather than the number on the original list. I am sorry if that causes problem for the transcription people. We will make a copy of this available at the end of the case so that they can cross-reference - - -

BRENNAN CJ: It would be helpful if you read into the transcript the reference to the particular report.

MR PULLIN: Yes, all right. Yes, I am happy to do that, your Honour. So I do not want to read anything from this case, but I simply refer to it. It is No 2 on the list that was sent down to the Court. It is Item B in the index to the bundle of documents and what that case reveals is a view of the section - - -

BRENNAN CJ: Now, this is Advance (NSW) Insurance Agencies v Matthews (1989)?

MR PULLIN: I am sorry, your Honour, yes[1989] HCA 22; , (1989) 166 CLR 606 and at 615 and 622, 615 in particular we can see the discussion about the changes wrought by the Insurance Contracts Act in relation to section 28 in particular. What we learn from that is that there is now a statutory code which works like this, that if there is fraudulent non-disclosure then really the common law position still applies, that the insurer is still entitled to avoid the policy.

So the question of fraud is the question which is determined in the usual way, but when it comes to non-fraudulent material non-disclosure the position is different and section 28 - it is in the bundle. It is No 1 on the list of authorities and it is Item A in the index to the bundle of cases. Section 28 is there and one can see that in relation to subsection (2) there appears what I have just stated, that if the representation or the non-disclosure was fraudulent, that is if the failure - that is the failure to make disclosure is fraudulent, may avoid the contract, but subsection (3) brings the change and the effect of it is that there is an express statement that the insurer cannot avoid the policy, that:

the liability of the insurer in respect of a claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred -

So the attention now switches under this legislation to the particular insurer rather than looking at the prudent insurer. Now, there has been debate about what this phrase means about the reduction of the liability of the insurer, exactly what that means. It now seems to be pretty well accepted after a string of cases that the reduction of liability can be to nil on the basis that the particular insurer would, if he leads evidence to satisfy the court, be able to establish that he would not have issued the policy at all had the disclosure of relevant facts occurred.

KIRBY J: That was endorsed in this Court, was it not, I think?

MR PULLIN: Well, it is in Alexander Stenhouse v Austcan - [1993] HCA 22; (1993) 67 ALJR 421, particularly at 424 to 5 - which is No 13. The case having succeeded on appeal in this Court, the Court sent it back to the South Australian Supreme Court by stating that there was the possibility that the liability could be reduced to nil and so the Court seems to have accepted on that page that that is a possibility which is open. The real debate which has taken place was about how the liability could be reduced to nil. Justice Deane in the Advance Case, which I just mentioned, said that he thought that the section worked by making inquiry about what increased premium would have been charged and so because an insurer might have increased its premium to the full amount of the risk, that could reduce the liability of the insurer to nil, but other cases and other judges have considered that and the consensus seems to be that that is rather unrealistic. They have rejected that obiter and it was obiter in the Advance Case by Justice Deane and said it is - - -

KIRBY J: You say Justice Deane, but I see at the header it is the Court, Was this arguendo, was it?

MR PULLIN: Yes. If you look under tab B - - -

McHUGH J: I think you are at cross-purposes. I think Justice Kirby has got in mind Stenhouse's Case. You are talking about Matthews, are you not?

MR PULLIN: Yes, that is correct, your Honour. In Advance Insurance Agencies v Matthews Justice Deane went on to look at this issue of whether or not liability could be reduced to nil and he offered some obiter views about whether you could. He said, yes, you can reduce liability to nil if you are an insurer, but he thought it would be via the taking off of the additional premium which might have been struck and, as I say, there have been a string of cases which are analysed pretty well in the Annotated Insurance Contracts Act Case which just sets out, as I say, the string of cases under section 28(3) leading to the conclusion that liability can be reduced to nil if the court is convinced that the particular insurer would not have issued a policy at all and, therefore, liability is reduced to nil for that reason.

Your Honours, the cases are also summarised in one of the cases on the list, which is No 3, Fruehauf Finance Corporation Pty Limited v Zurich Australian Insurance Limited (1996) ANZ Insurance Cases at 61-014 and there is a more recent case than that in the Annotated Insurance Contracts Act Collection of Cases, the author being Peter Mann and it is published by the Law Book Company and I do not propose to go through all those cases. I can just say that the end result seems to have been that that seems to be the accepted view of the law at this stage.

So I mention all of this because it does change the common law position to this statutory code. We must now concentrate not on the prudent insurer, but the particular insurer that we are concerned with and the importance of this is illustrated in a case that is not reproduced in full in the list, but it is a case of No 9 on the list and in the volume of cases it is letter JK, General Accident Insurance Co Australia Limited v Kelaw, which is an unreported decision of the Supreme Court of Western Australia, library number 970273, and I only need to tell you this, that this was a case where there was an insurer being sued by an insured who was faced with a denial of liability on the grounds of non-disclosure.

The case did not settle. It actually went right through to trial. The insurance company denied liability. It said, "Look, here are some facts that were not disclosed. We seek to avoid liability under section 28." The judge considered all the evidence that was led by the insurance company and in effect said, "Look, you were anxious to get into this industry," which was the horse racing industry, "You were keen to get coverage of this particular stable," and the conclusion of the court was that that particular insurer, because of that anxiety to get into that particular industry, would have insured notwithstanding the disclosure of the fact which had not been disclosed. So that shows the importance of looking at the individual insurer rather than looking at what a prudent insurer might do.

KIRBY J: But the extension of the logic of that seems to be that in every case you have just got to fight it all through and that would be extremely costly to the public as well as private purse.

MR PULLIN: Yes. If you do not have that agreement that your Honour referred to, you are faced with that, just as cases - and this happens in various places in the law. Take the position of a plaintiff suing two defendants. They seek to gain contribution, one from the other. One defendant settles with the plaintiff and then seeks to gain recovery from the other defendant as a tortfeasor under the tortfeasor legislation. It is clear enough that if there is no agreement about the quantum of the settlement or, indeed, the liability of the first defendant, who then sues the other defendant, that that defendant must, in effect, run the case against itself which the plaintiff would have run had the case gone to trial.

KIRBY J: It is rather an unattractive prospect because it is not just insurance brokers you are talking about. It is solicitors, doctors, it is every professional indemnity. It is rather an unattractive spectre that you - - -

MR PULLIN: I agree with that, your Honour, and I know that the Court will be anxious to find if there is some basis why that should not happen, but there are ways that it can be done. One of them has been mentioned. The other is that one can see from the authorities that a fairly relaxed approach will be taken by the court to the evidence which is necessary, I think, in one of the cases on the list, Biggin's Case, which I will refer to later. The court pointed out that if you have another action relating to the same facts and you get some findings in that case, although it may not bind other persons who were involved in the same set of facts, fairly close attention will be given to those in any subsequent proceedings concerning that same set of factual issues.

Anyway that does not help in this case, we say, because we contend there was no relevant evidence at all given that the plaintiff insured chose to lead no evidence at all from NZI, which was the insurer, and, therefore, we do not know what factors were at work in relation (a) to the settlement, but more importantly, to whether or not it had some system in place that if disclosure of the particular facts had been made it could establish that it would not have issued the policy.

HAYNE J: Is that then a challenge to the finding below that the settlement of 900,000 was reasonable or is it a challenge at a deeper level than that?

MR PULLIN: Well, what the challenge is to is the fact that both courts and particularly the trial judge - and this was picked up by the Full Court - was to say, "Did the plaintiff act reasonably in reaching the settlement that it did?" That was the wrong question. What it should have said - and this would have been reasonable as a question to ask - was the settlement reasonable viewed, in other words, viewed objectively, and the way you find out whether the settlement was "reasonable" is to find out what it was that the insurance company would have been able to establish if it had been forced to trial and there was no evidence of that. The insurance company did not go to trial and, therefore, we do not know what the insurance company would or would not have been able to say to establish whether it could succeed in reducing its liability to nil under section 28.

HAYNE J: The insured in this case faced a circumstance where its claim against the insurer was subject to doubt. Is that right?

MR PULLIN: It was faced with a contention by the - a defence and a denial of liability just like in General Accident v Kelaw. Nearly every insurance - well, wherever there is a case, the insurance company denies liability. They rarely win.

HAYNE J: In circumstances where the broker had not disclosed the past claims history of which the broker knew?

MR PULLIN: Yes.

HAYNE J: Is it then clear that the broker was in breach of its duty to perform its task in a proper fashion?

MR PULLIN: No question of that and we do not challenge it, your Honour.

HAYNE J: The question then becomes only a question of what damage flowed from it?

MR PULLIN: The question of causation, which I said at the beginning. That is correct, your Honour. So it is a causation issue.

HAYNE J: Do you say that in order to demonstrate that damage flowed the insured must go beyond showing that it had - and I will call it shortly a doubtful policy and had to go further to demonstrate positively that it could not have recovered on this policy?

MR PULLIN: Absolutely.

HAYNE J: That is the proposition, is it?

MR PULLIN: Yes, and particularly so in this case and there is a slight complicating factor which may have ended up in the trial judge forgetting what was necessary. The trial was in relation to liability alone. So one had to find in so far as the claim was in contract, the existence of a contract and a breach and there was a contract to exercise reasonable care and there was a breach. In relation to tort one had to find a duty to exercise reasonable care and there was one found and we do not dispute that and there was negligence, a breach of that duty, but in relation to tort, of course, as the third element, it is necessary to prove that there was damage.

So the item of damage chosen by the plaintiff insured when proceeding to court was to say, "Well, we are going to establish that the loss we suffered was the difference between the amount we would have recovered and the amount of the settlement, the difference between those two and we will leave for another day, if we win on that point, questions about interest and minor items that had to be added." In fact the minor items came to $200,000 by way of interest and other items, but the actual issue that was dealt with in relation to liability was this particular question of whether or not there was any loss, and the loss that was chosen to be identified and pursued so that the cause of action in tort could be made out was that difference between the amount claimed and the 900,000.

BRENNAN CJ: It is not just a question of whether there is a breach of a duty of care and then the next question is, well, what is the quantum of damage? It is a question of what is the damage or the loss suffered by the plaintiff and was the breach in question the cause of that loss?

MR PULLIN: Yes.

BRENNAN CJ: Now, how do you express the loss which the plaintiff suffered?

MR PULLIN: Well, the loss that was suffered was to be determined by finding out whether or not - - -

BRENNAN CJ: No, not the quantum; the description. What was it that was suffered?

MR PULLIN: The loss that was suffered was exactly what was in issue, that is, the difference between the amount of the cover that had been provided under the policy less a reasonable settlement. That would be the loss, but you do not determine what a reasonable settlement was by saying, "Well, I will not make any inquiries about what the insurer would have been able to establish and whether or not it was a good settlement or a bad settlement in that sense. I will just look at whether or not the plaintiff acted reasonably in settling." And a number of things were considered: was senior counsel's advice taken - - -

KIRBY J: I notice that the relief you seek on 96 at 50 is that the plaintiff's action be dismissed.

MR PULLIN: Yes.

KIRBY J: So that though you concede the breach of duty and though you concede in your answer to the Chief Justice that there is a quantification that flows from it, you say that because of the mis-presentation of the plaintiff's case he failed to prove it and, therefore, he goes away with nothing?

MR PULLIN: Yes. It was always an issue in the case and there was a reference to, I suppose, this point in the sense that the Full Court said, "Well, you, the defendant, could have called the insurer," which we say is a non-point against us because the onus was on the plaintiff, but one can see everyone pussyfooting around about calling the insurer because the insured, of course, is faced with an insurer who is making all these allegations against it and it may not prove helpful, may not provide assistance. We as broker have not come to the party and provided some money to bring about an overall settlement. So it may be - I am just speculating about what can happen in cases like this - that both parties find difficulty in finding out what will happen if they call the insurer.

In any event, no one did call the insurer and we say that if the plaintiff insured wanted to win the case, it had to establish whether or not the insured was entitled to reduce its liability to nil because we say under section 28 the position now is that policies are good unless the insured is able to establish that it has systems in house in its particular case which will enable it to convince the court that it would not have issued the policy had the facts been disclosed. The importance of this has been referred to in No 4 on the list of authorities, Bauer Tonkin Insurance Brokers v CIC and I do want to take the Court to this one. It is No 4 on the list or Item D in the bundle under tab D and in particular on the second page of the - - -

BRENNAN CJ: I do not think you need worry too much about the number on the Court list. We have not got the Court list, but we do want to have the reference to the authority itself.

MR PULLIN: Yes, I am sorry, your Honour. Yes, it is (1996) 9 ANZ Insurance Cases 61-298 and particularly at 76-342.

KIRBY J: Just before you go to that, I notice that the pleadings are not reproduced in the appeal book.

MR PULLIN: No.

KIRBY J: If Justice Toohey were here he would want to know what they say, so I am going to ask you. Was there simply a traverse of the claim that the breach caused the damage? Was there anything else in the pleadings, anything special about this issue?

MR PULLIN: There was nothing special, but it was an issue. The causation point was an issue in the case.

KIRBY J: How was it an issue? It was said at the trial, was it, that - - -

MR PULLIN: Well, I cannot give you a reference to it, but there is no doubt that that was in issue as to whether or not there had been any loss caused. It was always our contention that the policy was good unless the insurer could establish under section 28 in effect in this case that it was entitled to reduce its liability by convincing the court that it would not have issued the policy because it is far too great for a reduction by way of premium. No one would have paid a premium and it was not contended that this was a reduction via premium. It was a case where really the insured was saying, "We did pretty well. We got $900,000 in a case where it looked as though they were able to reduce their liability to nil. So we did fairly well and you should not be complaining about it."

BRENNAN CJ: Your case really is that the question of what is a good settlement is to be looked at by reference to the strength of the insurer's case, not by reference to the reasonableness of the conduct of the insured in accepting the insurer's offer?

MR PULLIN: Yes. Yes, it is, your Honour.

BRENNAN CJ: Is that right?

MR PULLIN: Yes, and I hope I do not retreat from that at any stage later on, your Honour.

BRENNAN CJ: You hope to demonstrate that, do you?

MR PULLIN: In this case of Bauer Tonkin there is a reference to, and a quote from Sutton Insurance Law in Australia, and I would just like to read it because it does state what we say the position is, a correct statement of position. It says:

"No doubt many insurers will assert that had they known the true facts they would never have entered into the contract of insurance, but a court is likely to insist on cogent evidence to this effect based on the particular insurer's office practice, rather than rely on the ipse dixit -

and that is the bare assertion -

of the insurer concerned. Indeed, evidence as to the particular insurer's office practice seems to be the only way in which the court can ascertain what that insurer's position would have been if the non-disclosure or the misrepresentation had not occurred."

There is a similar passage - - -

KIRBY J: Where was that passage, I am sorry?

MR PULLIN: It is on that second page of Bauer Tonkin Insurance Brokers, your Honour, which is under tab D in the bundle.

KIRBY J: Yes, thank you.

MR PULLIN: In any event, it is on page 76,342. Could I just take the Court back to the bottom of tab C. There are two items appearing there. One is the Fruehauf Case, which I am not referring to, and then under tab C there are a couple of pages out of Sutton Insurance Law in Australia Second Edition and another reference which is not referred to in Bauer Tonkin which we also say sets out the position and what is necessary. At the bottom of page 196 in paragraph 3.105 about five lines up from the bottom - we will start at the last paragraph, I will just read a few lines from it:

The onus, is of course on the insurer to show that he would have been in a different position had the failure of the assured to comply with the statutory duty of disclosure not occurred. He has to prove what would have happened in a hypothetical set of circumstances, and to do this it would seem essential for him to establish firm and clear guidelines as to the procedure to be adopted in specific situations. Only in this way will the onus of proof imposed on the actual insurer that he was induced to act in a particular way and suffered loss accordingly, be satisfied. If resort has to be had to what the insurance industry normally does in a certain situation, there is a danger that the requirements of s.28(3) will not be met, for by that subsection the reduction in the insurer's liability must be measured by the loss which the actual insurer has suffered and this may not be the same as the loss which a prudent insurer would have suffered in similar circumstances.

We refer to Kelaw as a case where the court may well have reached a conclusion that a prudent insurer thought that the facts not disclosed about the horse would have led a prudent insurer to be able to avoid liability at common law but because of the need to concentrate on the particular insurer and the keenness of that particular insurer to get into that industry led the court to the conclusion that it would not have refused to issue the policy even if there had been full disclosure.

McHUGH J: You keep talking about the necessity to prove an objective settlement and in the court below the judges spoke about loss of a chance, but is not this case really about your conduct forcing a plaintiff to do something? If there is an analogy in tort law, it is those old cases where the plaintiff jumps out of the carriage and gets hurt because he can see that it is being driven negligently, so that the plaintiff's case really is that it suffered loss of $800,000 because it was reasonably compelled to enter into a settlement for $900,000 instead of receiving $1,720,000 that it was entitled to under the policy.

MR PULLIN: Why was it reasonably compelled though, your Honour?

McHUGH J: That is right and then you have got to look at all the circumstances to see to what extent it was reasonably compelled to take the figure that it did and you would say, as I understand it, that that requires you to look at the strength of the defendant's case - - -

MR PULLIN: Get some evidence on it.

McHUGH J: - - - the insurer's case, but perhaps as perceived by the plaintiff. I notice that - - -

MR PULLIN: Not as perceived by the plaintiff, your Honour.. We say that is wrong to look at what the plaintiff thought because the plaintiff might have thought - - -

McHUGH J: I am not sure that is right. I mean this is the sort of agony of the moment case and that does not mean that you are not entitled to look at all these factors that you are talking about but it may be that a plaintiff is entitled to some latitude in this particular case.

MR PULLIN: The trouble is, your Honour, as we have said in our outline of submissions, if that is so then what if they had settled for $800,000 or $1.1 million or $500,000?

McHUGH J: Well, it is still a question of saying whether or not they were reasonably compelled to take that sum of money. On the special leave application that seemed to be the approach of Justice Dawson. It was not my approach at that time but I am beginning to think that Justice Dawson's approach might be the correct one.

MR PULLIN: No, there was nothing in it, your Honour.

HAYNE J: Your challenge would be a challenge to the minor premise of reasonableness rather than to the major premise that you seek to establish. Did not your client procure a policy subject to infirmity?

MR PULLIN: Well, we say we did not. We say we procured a policy which, because of the Insurance Contracts Act, now insurers cannot just say, "Well look, here are some facts. We deny liability. That is the end of your claim." Providing the court thought in objective terms that was it, that was good enough. But now that is not good enough and the cases reveal insurers coming along denying liability and saying, "We deny liability, we would never have issued the policy" and they are unsuccessful on many, many occasions.

All that is necessary for a plaintiff in this situation is to say, "Righto, we will subpoena the insurer and the insurer will tell us what it was that they would have established and would therefore have been able to show that liability under the policy would be reduced. " Because, absent that, section 28 now says the policy is good. You have good a good policy now, not subject to any defect unless the insurer is able to establish in its particular case that it would not have provided that cover.

McHUGH J: Who bears the onus? You say the plaintiff having taken less than it was prima facie entitled to by reason of section 28, it has the onus of showing that it was reasonable for it to take that sum of money?

MR PULLIN: Yes. If it had gone to trial against the insurer and not settled, the insurer would have had to lead evidence because, in the absence of any evidence, the policy would have been good. So the onus would have been on the insurer to produce evidence of what his office procedures were which would convince the court that it would have not issued the policy and therefore reduce its liability to nil. But, having settled with the insurer, another way to do it, in answer to your Honour Justice Kirby's query about what can be done, is to say, "Well, we will settle, but on condition that your officers give evidence in court about the matters that you are telling me convince you that you think you have got a good case on the non-disclosure point. So, we will settle. The figure you are offering, we just impose one condition, your officers will come to court and give that evidence." Pretty easy to do, so any fear that the courts will be clogged up can be - - -

KIRBY J: It seems a little slightly unrealistic because insurers do not generally want to reveal to the public what their general policies and attitudes in the case of claims which they are asserting are fraudulent claims of arson. Do not forget that. That was their primary case.

MR PULLIN: Well, we do not know, your Honour.

KIRBY J: This is a secondary case, they were saying material non-disclosure.

MR PULLIN: Well, I do not think that is quite fair, your Honour, for the other side because I think they would dispute that. I think they would say the first point raised was non-disclosure and then later on arson was added to the defence. We answer that by saying yes, but it was conceded and it is noted in the judgment in the reasons for decision that it was conceded by the insured that there was an investigation concerning arson on foot at some stage which then led to the amendment to the defence and led to the filing of that amended defence.

McHUGH J: Just before you go on, do you rely in any way or is it against you that the trial judge's acceptance of Mr Pezzano's evidence that counsel had told him that he should settle because otherwise he would lose everything because of the non-disclosure? How do you deal with that?

MR PULLIN: We say that it does not assist at all in deciding whether or not, let us say it was junior counsel rather than senior counsel, it just does not matter, we say, your Honour, and it does not give it any particular credence that senior counsel said it or junior counsel said it. Let us say that senior counsel came down not very well prepared and had a bit of a rough view of the thing. Let us assume that he had a lot of information but had miscalculated something or, I mean one does not know what factors motivated senior counsel to give that advice. It may have been wrong.

KIRBY J: This goes back to your submissions that that goes to the reasonableness of the plaintiff's conduct looking at it from the plaintiff's camp, but that the inquiry must be more even-handed. It must be looking both at the plaintiff's position and the defendant's and if, in fact, the rule that you urge is established, it would mean either (a) that there was pressure upon the parties to reach some consensus about the reasonableness of the settlement or (b) that did not. Then at the trial, they would either have to call the insurer or call general insurance evidence to the point about what a reasonable or what a prudent insurer would do.

MR PULLIN: We say that would not have helped, your Honour, not the general material because in Bauer Tonkin the issue was, "Let us look at what you, the insurer, have done in other cases to find out what you would have done in the particular case". So it was a discovery point in Bauer Tonkin about disclosing other policies where they had been issued in similar circumstances. The whole attention of section 28 is directed to the particular insurer, not to the general industry.

KIRBY J: But it surely just cannot be left to the say so of a particular claims manager. A court would have to look at the matter objectively and look at what they did in other like cases, otherwise you are a hostage to what a particular claims manager says.

MR PULLIN: Well, except that there may be a very stern view in a particular insurance company that as soon as you have four claims of a particular kind, we do not issue policies. If they have got that in their manual and that satisfies a particular circumstance, then that insurer would be able to say, "We would not have issued the policy". Another insurer might not have that policy or provision in their manual and might not, therefore, be able to convince the court that the - - -

KIRBY J: But all I am saying is that surely the insured would be able to put that to the test. It may be in the manual but it may not be what they do.

MR PULLIN: I agree with all of that, your Honour.

KIRBY J: That seems to suggest that you can get to what a particular insurer did as a matter of practice as distinct from what they said they would do or what their manual said.

MR PULLIN: Well, I do not think we are at cross-purposes then, your Honour.

KIRBY J: It is susceptible to proof.

MR PULLIN: Yes. You just look to see what it is the insurer would have done. Admittedly, we have got this problem that it is a hypothetical case because you are trying to work out what the insurer would have done had there been disclosure and the starting point, as Sutton's view is, you are not going to get very far just coming along and putting the claims manager in the witness box who then says, "If I had known this I would never have issued the policy". It is not going to work nowadays. What you have got to do is to be able to say, "I would not have issued the policy and the reason I would not have issued the policy is - look, here is our manual that says we do not issue it in these circumstances." Or, you might be able to do it by reference to the general industry by saying, "This is so bad that our statement that we would not have issued the policy should be accepted."

In this case it cannot be that because the plaintiff led evidence that other insurers would have issued a similar policy if there had been disclosure of the facts not disclosed to us and they would only have charged another $7,000 in premium for the sort of cover that has been talked about.

McHUGH J: $9,000.

MR PULLIN: It is referred to in our outline of submissions in paragraph 10. When we went away to agree the facts, given the trial judge's decision, and in accordance with that the plaintiff was prepared to agree that another insurer or, indeed, even NZI would have issued a policy, a like policy of insurance for an additional premium of - I am not sure whether it is an additional premium or the increased premium to this figure but anyway, the figure is $9,106. It is chicken-feed in reality and, as I say, the evidence from a broker who had been called by the insured was - and I must take the Court to that - I think it is the only piece of evidence that I need to take the Court to, it is appeal book page 30, line 40. This is talking about evidence led by the respondent in this case, the insured:

Some evidence was led.....from the independent broking expert, Mr Fuller. He was asked, in the course of his evidence, whether, given the agreed claims history.....he could have "placed the plaintiff with an ISR.....insurer in 1992". He responded by saying, "I would think so. I am not sure of what cost or on what terms but, yes, I would place the cover". He said also that he thought that the premium "would be a bit higher" but did not say how much higher.

He was asked, in cross-examination, whether in his experience a reasonable insurer would have provided cover even with disclosure of the relevant prior claims and responded by saying, "Yes. Maybe not all insurers, but I mean, an insurer would, yes." The following exchange then took place between senior counsel for the defendant and Mr Fuller:

"Well, a reasonable insurer. Is that the case?---Well, hopefully they are all reasonable, but, yes.

And is NZI a reasonable insurer?---Yes."

KIRBY J: Did you object to this evidence?

MR PULLIN: No, this was me getting this evidence out.

McHUGH J: He relied on it heavily.

MR PULLIN: This was me, your Honour.

KIRBY J: Is not that completely inconsistent with what you have said, that the focus is on what the particular insurer would do rather than on what the insurance market will offer.

MR PULLIN: That is why we led to the last question which is, if you are saying that you could get other insurance companies to issue the policy, notwithstanding these claims that are said now to be so material that NZI would not have issued the policy at all and had a good defence, he agrees that NZI was a reasonable insurer, the inference being, "Well I think I could have got the same policy anyway for a bit more premium".

McHUGH J: He started with the general proposition and worked down to the concrete.

MR PULLIN: And then the facts then agreed are that the additional premium that would have been charged was $9,000. Well, if the loss is $9,000 we would probably be happy with that but not $1 million, which is what we were landed with by way of judgment in the end, which was just to take the difference between what the plaintiff chose to settle for and the amount of the cover that was under the policy.

BRENNAN CJ: Can I take you back to a question that Justice Hayne asked you some time ago? The real proposition is that the settlement which a plaintiff must prove in an action like this is a reasonable settlement, not that the plaintiff conducted himself reasonably. That is the distinction.

MR PULLIN: Yes.

BRENNAN CJ: Now in determining whether the settlement is reasonable, two questions seem to me to arise. One is one looks at all the objective facts that are known, as distinct from the advice which motivated the plaintiff to take the settlement, and one can arrive then at whether or not the conduct of taking the settlement was reasonable. The second question is whether it is essential to a finding of reasonableness that the issues which you say only the insurer could prove have to be led in order to establish that reasonableness.

Now those are really two quite distinct propositions, are they not? In other words, looking at the objective facts, not knowing what is in the brief, but looking at the objective facts on the court door, this was reasonable.

MR PULLIN: Yes. The second question is the critical question.

BRENNAN CJ: That is right.

MR PULLIN: Without that being dealt with, one cannot get to a decision because you are just left with all sorts of speculation.

BRENNAN CJ: Why not? Well, maybe. Why cannot one say that what was lost by the negligence of the broker was an impregnable policy? It was a policy which was open to challenge. Now, it was challenged and then, having regard to the pleadings and all the known facts at the time of the litigation, a settlement is taken. We do not know what is in the insurer's brief but, nonetheless, that settlement at that time can be characterised as reasonable having regard to all the risks of litigation.

MR PULLIN: It does not work, your Honour, in all those loss of chance cases to come along to say, "I would like you to assess the loss of chance". Let us assume it is a strict loss of chance case, that we are not really dealing with a liability issue or causation, that in reality we are looking at assessment of damages where all the cases say once you are into assessment of damages do not worry about the balance of probabilities.

BRENNAN CJ: I am not talking about assessment of damages, we are talking about - - -

MR PULLIN: I think you have to get to that point, your Honour, because if you are going to run that argument, if that argument is going to be advanced, it has to be advanced on the basis that by now you are into the assessment of damages where one does not worry about proof on the balance of probabilities because it is a causation issue, but let us shift into the assessment of damages mode, and the High Court has dealt with that on several occasions, and forget about trying to determine whether or not you had a 51 per cent chance or a 49 per cent chance.

You can just make an assessment such as the Poseidon v Sellars Case where you just say, "Look, here is a commercial opportunity that may or may not have occurred where in the realm of assessment of damages we just have to do the best we can and we make an assessment and it is not based upon balance of probabilities". In this case, we were trying to find out whether any loss had been caused at all.

McHUGH J: But the loss was caused, it definitely was caused, and you could only break the chain of causation by saying that the act of settlement was an unreasonable step on the part of the plaintiff.

MR PULLIN: We say it was because they had a good policy. The Act says it is a good policy. Section 28 says it is good, it actually says it in those words.

BRENNAN CJ: Let us take your counsel who came down from the hills that morning and had a fairly rough look at it. What did he find? He found that there was a representation made on behalf of a party who knew the true facts and did not disclose them for the purpose of inducing the policy to be issued. Why is that not fraud?

MR PULLIN: It was not alleged as fraud because it was not fraud.

BRENNAN CJ: Maybe it was not, but what are the facts?

MR PULLIN: It is not fraud, your Honour, I do not have to address that.

BRENNAN CJ: Why not?

MR PULLIN: Because it was not ever alleged that it was fraudulent. Under the circumstances, we need not go into the circumstances but, in fact, there was a debate about how the proposal had been filled out, it had been left with the insured, as usual it was partly filled out by the insured, partly filled out by us, but there was no allegation that we acted fraudulently. There was no allegation by the insurance company that they were entitled to avoid by reason of fraud. It just is not a case where counsel should have been contemplating it because if his client had said, "Why are you talking about fraud? We have not alleged fraud against the broker, the insurance company has not raised an allegation of fraud in an attempt to avoid the policy." One would ask the counsel why he or she was raising such a point. So we would say it is not relevant, your Honour.

KIRBY J: But we have here a disputed case which has gone to trial or gone to litigation. We have got senior counsel. The parties are at arm's length and they settle. I think it is a very unreal proposition that you ask the insurer, dealing with people who are often repeat players, to reveal what was in their brief and that they got a good or even settlement. That is the very purpose of having senior legal representatives or skilled legal representatives to settle. This is an arm's length dealing.

MR PULLIN: Maybe so, your Honour, but I must say that I have seen in my experience in tortfeasor cases settlements where the defendant has settled and said to the plaintiff, "We will settle, but you must go into the witness box as our first witness."

KIRBY J: Yes, but that is a stranger to the litigation. I am talking here of the insurer itself and its inner workings and assessments.

MR PULLIN: The insurer is the equivalent of the situation where you have got plaintiffs suing two defendants in a tortfeasor case. One tortfeasor says, "I will offer you a certain sum of money" to the plaintiff but that defendant knows that if the case goes on and the other defendant will not agree to contribute anything, that defendant who is paying up will have to run the case which the plaintiff was going to run against the settling defendant in order to win the case against the other defendant. Now, I agree that insurers might not want to disclose this information but they might be quite happy to do it if they say, "Look, this is the case we have" - - -

KIRBY J: Why is not the solution Justice McHugh raised the appropriate one? That is, where you have got people at arm's length and they said they would settle on this basis, that if you want to say that it was not fair as between the insurer and the insured, that you have to establish that because, on the face of things, it looks as though it is an arm's length settlement which is found here to be reasonable as between the insured and the - - -

MR PULLIN: But why is it reasonable, your Honour? What if they had settled for $700,000?

McHUGH J: Have you finished answering Justice Kirby?

MR PULLIN: Yes, I have.

McHUGH J: Causation here is plain, is it not? The plaintiff's loss on any common sense basis flows directly from your negligent conduct. The only question is - - -

MR PULLIN: But why though, your Honour?

McHUGH J: Because as a result of what you did, they took a step which resulted in financial loss. They took $900,000 instead of $1,720,000.

MR PULLIN: No, they denied liability, your Honour, but they had both arson and averaging in amongst it all. It was not just non-disclosure.

McHUGH J: Yes, but the judge held that had nothing to do with the plaintiff's action in settling a particular - - -

MR PULLIN: He did not find that the insurer did not think that they had a really good case, your Honour.

McHUGH J: What I want to put to you for the moment is that that has got nothing to do with it. The plaintiff has suffered loss as a result of conduct of yours, whether you want to call it interpersonal causation, whatever, billiard ball causation but whatever it is, they took a step which resulted in financial detriment to them. Now, the chain of causation being there, are you not liable unless you can show, to use the Hart and Honore terminology, that this was a voluntary act on the part of the plaintiff by reason of its unreasonableness.

MR PULLIN: I do not accept the premise, your Honour. I just do not accept the premise because we have got section 28 which says it is a perfectly good policy.

McHUGH J: Well, that may be part of the - - -

MR PULLIN: And they denied liability. No question that the insurer denied liability but it had a bag of reasons why it thought that it should not have to pay up the full amount of the claim.

McHUGH J: Yes, I know, but you are in breach. Sure the plaintiff has got section 28, but the plaintiff is faced with these problems that there may be a reduction so it elects to take a settlement. Now, as a matter of common sense, its loss seems to have flown directly from your negligence. The only question is whether the law will insist that you be responsible for that loss or can you disown it by reason of the unreasonableness of the plaintiff's conduct?

MR PULLIN: We say that it is just trying to help too much, your Honour. Just because there is a duty and a breach of duty, lots of cases are concerned - there is a case of solicitor's negligence where there was a settlement and the decision of the Court of Appeal in New South Wales was not only were not you, the person who settled, liable. We have looked at the facts, we have now examined all the facts that would have been led in the case against you, (a) we do not think you were negligent and (b) we think that the amount that you did get the settlement for was more than you would have got anyway. So in all these cases even if, and I do not concede it for one moment that it is a question of moving to - that we have moved past causation and we are in the realm of assessing what the loss was - none of these loss of chance cases are cases where the plaintiff comes on and says, "I am not going to tell you all the relevant facts. I have settled for a figure and it was unreasonable that I have ended up in this situation. Just give me some money."

You have actually got to lead the evidence that would have been led to establish whether you had a good cause of action or not. Johnson v Perez, which was a solicitor's negligence case, with the cause of action having been lost because of a limitation period being not attended to, was purely an assessment of damages case, but in that case there was a reference to the English case of Kitchen and I have forgotten the other party, Air Force Association, I think, where the court said you have to look to see what the cause of action was. If it was a good cause of action, you are going to get a lot of money from the solicitor. If it was not a good cause of action, you will not get very much money and if you are going to lose the case, we will not give you anything.

McHUGH J: But you have got a cause of action here. If you have got nothing else you have got breach of contract, and the plaintiff is entitled to nominal damages.

MR PULLIN: We are happy with nominal damages too, your Honour.

BRENNAN CJ: How much longer, given interruptions, do you think you will be, Mr Pullin?

MR PULLIN: I would say another half an hour, without interruptions, your Honour.

McHUGH J: Is that a threat?

BRENNAN CJ: Mr Pringle, how long do you expect your argument to take?

MR PRINGLE: About three quarters of an hour, your Honour.

BRENNAN CJ: Thank you very much. The Court will adjourn until 10.15 tomorrow morning.

AT 4.19 PM THE MATTER WAS ADJOURNED

UNTIL WEDNESDAY, 22 OCTOBER 1997