MANNINGS SIX PRINCIPLES
OF GENERAL INSURANCE
A Comprehensive Guide to Utmost Good Faith, Indemnity,
Subrogation, Contribution, Insurable Interest & Proximate
Cause
Dr Allan Manning
National Library of Australia Cataloguing-in-Publication entry
Author:
Title:
ISBN:
Notes:
Subjects:
Dewey No.
Manning, Allan, 1954-.
Mannings Six Principles of General Insurance: A Comprehensive Guide to
Utmost Good Faith, Indemnity, Subrogation, Contribution, Insurable Interest &
Proximate Cause / Allan Manning.
9780958094863 (pbk.)
Includes index.
Insurance--Australia--Handbooks, manuals, etc.
368.01
First published December 2010
Author, Allan Manning
Review and design by Secretaries on the Move Pty Ltd, Camberwell, Victoria, Australia
Printed by Q-Print, Albion, Queensland, Australia
Published by Mannings of Melbourne Pty Ltd, Camberwell, Victoria, Australia
Copyright  2002-2010 Mannings of Melbourne Pty Ltd
FOREWORD
By Keith Hanslow
Many say, and I know from experience, that general insurance is one of the most complex areas of
law. At the same time, it is one of the most extremely interesting areas of the law.
In any discipline, a body of law usually develops over time from a combination of historical
principles, current practices, statutes and case-based precedents. The development of the law of
general insurance is no different. It is just the result that is extremely complex and difficult to
understand, let alone apply.
This valuable book examines six of the underlying principles of general insurance in a style that is
interesting, practical and easy to read.
As with Dr Allan Manning's other books, this is a very thorough work that covers each principle in
great detail from its earliest history to the most recent court interpretations. The just under 650
footnotes throughout the book will guide the reader to useful sources of further information,
including the relevant case law precedents.
What sets this book apart is that it contains Allan's extensive practical experience gained over a
long period as a senior loss adjuster and claims consultant. This adds an invaluable extra
dimension to what could have been a purely academic overview.
As an understanding of these principles–and providing the right advice to an Insured and/or making
the right decision at claim time–are critically important to the insuring public, I recommend this book
to all involved in the insurance sector.
With this text, Dr Manning provides yet another valuable resource to the insurance sector. I believe
‘Mannings Six Principles of General Insurance’ is the book every practitioner in the insurance
sector must have, and refer to time and time again.
Keith Hanslow B Ec LLB
Director, Millens Lawyers
Melbourne, 26 October 2010
Mannings Six Principles of General Insurance
Page
i
CONTENTS
INTRODUCTION .................................................................................................................................1
CHAPTER 1 - THE FIRST PRINCIPLE OF INSURANCE IS ‘UTMOST GOOD FAITH’ ...................5
1.1
Introduction....................................................................................................... 5
1.2
The Principle of Utmost Good Faith ................................................................. 5
1.3
Utmost Good Faith after the Contract has been Entered Into ......................... 7
1.4
Principle Continues after the Claim Occurs ..................................................... 8
1.5
Similar Rules Apply in a Recovery Action ...................................................... 10
1.6
Put Yourself in ‘Their Shoes’ .......................................................................... 10
1.7
Principle Reinforced by Statute ...................................................................... 11
1.8
Can You be more Honest than Honest? ........................................................ 17
1.9
Summary of Chapter ...................................................................................... 19
1.10
Revision Questions ........................................................................................ 20
2.1
Introduction..................................................................................................... 22
2.2
Indemnifying the Insured who carries out their Own Repairs ........................ 23
2.3
Modern Policies now offer more than Indemnity ............................................ 24
2.4
‘Fall Back’ is Indemnity ................................................................................... 25
2.5
How is the ‘Indemnity Value’ of an Asset Calculated? ................................... 27
2.6
Summary of Chapter ...................................................................................... 31
2.7
Revision Questions ........................................................................................ 32
CHAPTER 3 - THE THIRD PRINCIPLE OF INSURANCE IS ‘SUBROGATION’ ............................34
3.1
Introduction..................................................................................................... 34
3.2
The Rights of the Insurer ................................................................................ 36
3.3
The Source of an Insurer's Right of Subrogation ........................................... 37
3.4
Restrictions on an Insurer’s Right of Subrogation.......................................... 40
3.5
Provisions of the Insurance Contracts Act 1984 ............................................ 52
3.6
Control of Proceedings ................................................................................... 60
3.7
Distribution of the Proceeds of Recovery from Third Parties ......................... 63
3.8
Common, but Erroneous, Approach to Recovery .......................................... 69
3.9
Summary of Chapter ...................................................................................... 70
3.10
Revision Questions ........................................................................................ 71
Contents
CHAPTER 2 - THE SECOND PRINCIPLE OF INSURANCE IS ‘INDEMNITY’ ...............................22
Page
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Mannings Six Principles of General Insurance
CHAPTER 4 - THE FOURTH PRINCIPLE OF INSURANCE IS ‘CONTRIBUTION’ .......................74
4.1
Introduction..................................................................................................... 74
4.2
Contribution Defined....................................................................................... 75
4.3
Early Case Law .............................................................................................. 75
4.4
When does Contribution arise at Common Law? .......................................... 77
4.5
‘Other Insurance’ Clauses .............................................................................. 83
4.6
Contribution and the Insurance Contracts Act 1984 ...................................... 84
4.7
Notice Provisions............................................................................................ 91
4.8
Methods of Apportionment ............................................................................. 92
4.9
Who Deals with Contribution in Practice? ...................................................... 96
4.10
Summary of Chapter ...................................................................................... 96
4.11
Revision Questions ........................................................................................ 97
Contents
CHAPTER 5 - THE FIFTH PRINCIPLE OF INSURANCE IS ‘INSURABLE INTEREST’ ................99
5.1
Introduction..................................................................................................... 99
5.2
Overview of Insurable Interest and the Reason for Change .......................... 99
5.3
The Origins of Insurable Interest .................................................................. 101
5.4
Australian & New Zealand Law .................................................................... 104
5.5
Australia’s Insurance Contracts Act ............................................................. 105
5.6
New Zealand’s Insurance Law Reform Act .................................................. 114
5.7
Should the Doctrine of Insurable Interest have been Retained? ................. 115
5.8
Summary of Chapter .................................................................................... 116
5.9
Revision Questions ...................................................................................... 117
CHAPTER 6 - THE SIXTH PRINCIPLE OF INSURANCE IS ‘PROXIMATE CAUSE’ ..................119
6.1
Introduction................................................................................................... 119
6.2
Proximate Cause and the ISR Policy ........................................................... 121
6.3
The Definition of Proximate Cause .............................................................. 123
6.4
Proximate Cause as it applies to a Fire & Perils Policy ............................... 124
6.5
Circumstances where Cover is Excluded (Mark V Policy) ........................... 135
6.6
Terms Used in Other Policies including ISR Manuscript Wordings ............. 136
6.7
Proximate Cause in Relation to Interruption Insurance ............................... 136
6.8
Proximate Circumstance .............................................................................. 140
6.9
Interruption Causation .................................................................................. 141
6.10
Quantum Calculation .................................................................................... 148
6.11
The Onus & Standard of Proof ..................................................................... 149
6.12
How Proximate must a Cause be, before it is a ‘Proximate Cause’? .......... 154
6.13
Determining Proximate Cause where there is No Direct Evidence ............. 157
6.14
Determining Proximate Cause where there is More than One Cause ......... 158
6.15
Summary of Chapter .................................................................................... 164
6.16
Revision Questions ...................................................................................... 165
Mannings Six Principles of General Insurance
Page
iii
CHAPTER 7 - ANSWERS TO REVISION QUESTIONS ................................................................167
INFORMATION ...............................................................................................................................168
INDEX..............................................................................................................................................170
CASE STUDIES
Case Study 1. Aon Risk Services v ANU ...........................................................................................16
Case Study 2. QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd ...............................77
Case Study 3. Collyear v CGU Insurance Ltd ...................................................................................79
Case Studies
Case Study 4. Zurich v Metals & Minerals Insurance ........................................................................86
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Mannings Six Principles of General Insurance
COURT CASES
Court Cases
Cases
Advance (NSW) Insurance Agencies Pty Ltd & Anor v Matthews & Anor (1989)............................ 15
Albion Insurance Co Ltd v Government Insurance Office of New South
Wales (1969) ........................................................................................................ 75, 81, 82, 96
AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2005)......................................................... 62
AMP Workers Compensation Services (NSW) Ltd v QBE Insurance Ltd (2001) ...................... 77, 78
Anderson v Morice (1874) .............................................................................................................. 157
Aon Risk Services Australia Ltd v Australian National University (2009) ........................................ 16
Arthur Barnett Ltd v National Insurance Co of New Zealand Ltd (1965).......................................... 61
Atlantic Maritime Co Inc v Gibbon (1954) ...................................................................................... 160
Austin v Zurich General Accident & Liability Insurance Co Ltd (1944) ............................................ 35
Austin v Zurich General Accident & Liability Insurance Co Ltd [1945] ............................................. 35
Australian Casualty Co Ltd v Federico (1986) ....................................................................... 120, 135
Austress – PSC Pty Ltd and Carlingford Australia General Insurance Ltd
v Zurich Australian Insurance Ltd (1992) ............................................................................... 85
Baloise Fire Insurance Co v Martin (1937)....................................................................................... 64
Banque Financier de la Cite v Parc (Battersea) Ltd (1999) ............................................................. 37
Barbaro v NZI Insurance Australia Ltd (1994).................................................................................. 11
Bater v Bater (1951) ....................................................................................................................... 153
Bauer Tonkin Insurance Brokers v CIC & Ors (1995) ...................................................................... 15
Bennett v Minister for Community Welfare (1992) ......................................................................... 154
Bit Badger Pty Ltd v Cunich (1996) .................................................................................................. 41
Blaauwpot v Da Costa (1758) .......................................................................................................... 39
BMW Australia Finance Ltd v Miller & Associates Insurance Broking Pty Ltd (2009) ...................... 6
Board of Trade v Hain Steamship Co (1929) ................................................................................. 160
Boral Resources (Queensland) Pty Ltd v Pyke (1989) .................................................................... 58
Boral Resources (Queensland) Pty Ltd v Pyke (1992) .................................................................... 58
Bourne v Stanbridge (1965) ............................................................................................................. 60
Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd & Anor (2007) ...................................... 29
Bridgeman & Ors v Allied Mutual Insurance Ltd (1999) ................................................................. 128
Bridgeman & Ors v Allied Mutual Insurance Ltd (2000) ................................................................. 129
Briginshaw v Briginshaw (1938) ..................................................................................................... 152
British Traders Insurance Co Ltd v Monson (1964) ....................................................................... 109
British Westinghouse Company v Underground Electric Railways (1912) ........................................ 8
Broadlands Properties Ltd v Guardian Assurance Co Ltd (1984) .................................................... 60
Brooks v McDonnell (1835) .............................................................................................................. 39
Burnand v Rodocanachi Sons & Co (1882) ..................................................................................... 35
Cagle Inc v Sammons (1977) ........................................................................................................... 34
Caledonian North Sea Ltd v British Telecommunications Plc (Scotland) & Ors [2002] ................... 50
Canada Rice Mills Ltd v Union Marine and General Insurance Co Ltd (1941) .............................. 157
Carter v Boehm (1766) ............................................................................................................... 5, 6, 7
Castellain v Preston (1883) ...................................................................................... 23, 34, 36, 40, 82
CE Heath Underwriting & Insurance (Aust) Pty Ltd v Edwards Dunlop & Co Ltd (1993) .................. 7
Chapman v Hearse (1961) ............................................................................................................. 119
CIC Insurance Ltd v Bankstown Football Club Ltd (1977) ............................................................... 26
City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance
Ltd (1985) ............................................................................................. 125, 139, 158, 159, 160
City Tailors Ltd v Evans (1921) ...................................................................................................... 145
Collyear v CGU Insurance Ltd (2008) ........................................................................................ 79, 80
Commercial Union Assurance Co v Lister (1874) ............................................................................ 60
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd
& Anor (1991) ......................................................................................................................... 15
Commonwealth v Butler (1958) ...................................................................................... 154, 155, 164
Craig v Associated National Insurance Co Ltd (1984) ................................................................... 152
Cusmano v Pinner & Ors (1998) .................................................................................................... 112
D & S Moustakos (t/as Port Adelaide Globe & Gift Art Farmers) v Federation
Insurance Ltd (1984) .................................................................................................... 149, 152
Darrell v Tibitts (1880) ...................................................................................................................... 35
Davies v Taylor (1974) ................................................................................................................... 152
Devlin v Queen Insurance (1882)................................................................................................... 145
Dickinson v Motor Vehicle Insurance Trust (1987) ........................................................................ 120
Dudgeon v Pembroke (1877) ......................................................................................... 125, 139, 158
Eastern Suburbs Leagues Club Ltd v Royal & Sun Alliance Insurance Australia
Ltd (2003) ............................................................................................................................. 161
Easton Extension Australasia and China Telegraph Company Ltd v Federal
Commissioner of Taxation (1923) .......................................................................................... 42
England v Guardian Insurance Ltd [2000]........................................................................................ 63
Etherington v Lincolnshire & Yorkshire Accident (1909) ................................................................ 128
Euler Hermes UK Plc v Apple Computer BV (2006) ........................................................................ 61
Everett v London Assurance (1865) ............................................................................... 131, 132, 133
Fidelity Co v Gas Co (1892) ....................................................................................................... 36, 49
Gaskarth v Law Union (1876)......................................................................................................... 132
Godin v London Assurance (1758)............................................................................................. 75, 82
Godwyne v Profyt (after 1393) ......................................................................................................... 44
Government Insurance Office (NSW) v Crowley (1975) .................................................................. 93
Government Insurance Office (NSW) v RJ Green & Lloyd Pty Ltd (1966) .................................... 135
GPS Power Pty Ltd & Ors v Gardiner Willis & Associates Pty Ltd (2001) ....................................... 39
GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd (2000) ................................................. 46
GRE Insurance Ltd v Ormsby (1982) ............................................................................................. 149
GRE Insurance Ltd v QBE Insurance Ltd (1985) ............................................................................. 93
Gunns Forest Products Ltd v North Insurance Pty Ltd & Ors (2004) ............................................. 162
Hall and Long v The Railroad Companies (1871) ............................................................................ 49
Henry Booth & Sons v Commercial Union Assurance Co Ltd (1923) ............................................ 148
HIH Casualty & General Insurance Ltd v FAI General Insurance Co Ltd (1997)............................. 81
Homeowners Insurances Pty Ltd v Job (1983) .............................................................................. 149
Howard v Australian Jet Charter Pty Ltd & Ors (1991) .................................................................. 108
Ilsley v Wattyl Australia Pty Ltd (1997) ................................................................................... 120, 134
Insurance Co v Tweed (1968) ........................................................................................................ 132
Insurance Commission of Western Australia v Kightly (2005) ......................................................... 65
Ionides v Universal Marine Insurance Co (1863) ........................................... 124, 127, 133, 135, 154
Isitt v Railway Passengers’ Assurance Co (1889) ......................................................................... 127
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Mannings Six Principles of General Insurance
Court Cases
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Mannings Six Principles of General Insurance
Jespersen (decd) v Royal Insurance Australia Ltd (1989) ............................................................. 158
JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay)
(1987) ................................................................................................................... 139, 158, 160
John Collyear v CGU (2007) ............................................................................................................ 80
John Cory & Sons v Burr (1883) .................................................................................................... 160
John Edwards & Co v Motor Union Insurance Co Ltd (1922) .......................................................... 39
John v Rawling (1984) ...................................................................................................................... 93
Johnston v West of Scotland (1828) .............................................................................................. 131
Jones v Devonfield Enterprises Pty Ltd (1995) ...................................................................... 120, 134
Kern Corporation v Walter Retrading (1987).......................................................................... 113, 114
King v Victoria Insurance Co (1896) ................................................................................................ 35
Koorangang Cement Pty Ltd v Bates (1994) ......................................................................... 120, 134
La Compania Martiartu v Royal Exchange Assurance Corp (1923) ...................................... 157, 158
Lambs Head Shipping Co Ltd v Jennings (The Marel) (1994) ............................................... 150, 157
Larson-Juhl v Jaywest (2001) .......................................................................................................... 63
Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd & 2 Ors [2005] ........................... 121
Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd & Ors [2004] .............................. 121
Lawrence v Accident Insurance Co (1881) .................................................................................... 124
Layne & Bowler (Australasia) Pty Ltd v Pearson Machine Tool Co Ltd (1983) ............................... 81
Legal & General Insurance Co Ltd v Eather (1986) ....................................................................... 149
Lennock Motors Pty Ltd v Pastrello (1990) ...................................................................................... 58
Lewis v Springfield Fire & Mutual (1857) ....................................................................................... 131
Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd (1918) ...... 124, 133, 154, 158
Lickiss v Milestone Motor Policies of Lloyds (1966) ......................................................................... 63
Liga Knitting Mills v Lombard Insurance Co Ltd (1984) ................................................................. 152
Lord Napier v Hunter [1993] ....................................................................................................... 37, 64
Lucas v The New Zealand Insurance Co Ltd (1983)........................................................................ 26
Lucena v Craufurd (1802) ........................................................................................................ 99, 101
Lukies v Ripley (1994) .................................................................................................................... 112
Lumley General Insurance Ltd v QBE Insurance (Aust) Ltd (2008)................................................. 78
Lynn Gas & Electric Co v Meriden Fire Insurance Co (1893) ........................................................ 131
Mackenzie v Whitworth (1875) ............................................................................................... 102, 103
Macoura v Northern Insurance Co Ltd (1925)................................................................................ 107
Malec v JC Hutton Pty Ltd (1990) .................................................................................................. 151
Manufacturer's Mutual Insurance Ltd v National Employer's Mutual General
Insurance Association Ltd (1990) .......................................................................................... 82
March v E & MH Stramare Pty Ltd (1991) ...................................................................................... 154
Mark Rowlands Ltd v Berni Inns Ltd (1986) ............................................................................... 41, 42
Marsden v City & Country (1866) ................................................................................................... 133
Mason v Sainsbury (1782) ............................................................................................................... 39
McGibbon v Queen Insurance Co (1866) ...................................................................................... 133
McLaren v Commercial Union Assurance Co (1885) ..................................................................... 133
McMahons Tavern Pty Ltd v Suncorp Metway Insurance Ltd (2004) .................................... 138, 166
McNeill v O’Kane (2002) .................................................................................................................. 15
Mercantile Mutual Insurance Co Ltd v Hewitt (1985) ..................................................................... 152
Midland Insurance Co v Smith (1881) .............................................................................................. 40
Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd (1984) ...... 136
Montoya v London Assurance (1851) ............................................................................................ 131
Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1969) ........................................ 62, 63
Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1987) .............................................. 38
Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1988) .............................................. 63
Morley v Moore (1936) ..................................................................................................................... 60
Morning Vale Pty Ltd v Pennefather (1992) ..................................................................................... 58
Morris v Ford Motor Co Ltd (1973) ................................................................................................... 50
Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality (1985) ..................................... 17, 18
Nare Chemical v Cosmos Chemical................................................................................................. 62
National & General Insurance Co Ltd v Chick (1984) ............................................................ 155, 156
National Employers Mutual General Insurance Co v CMT Constructions (1987)............................ 62
National Fire Insurance Co v MacLaren (1886) ............................................................................... 64
National Justice Compania Naviera SA v Prudential Assurance Co Ltd
(The Ikarian Reefer) [1993] .................................................................................................. 150
National Justice Compania Naviera SA v Prudential Assurance Co Ltd
(The Ikarian Reefer) [1995] .................................................................................................. 150
North British & Mercantile Ins Co v Liverpool, London & Globe Ins Co (1877) ......................... 75, 80
North British and Mercantile Insurance Company v London Liverpool
Insurance Company (1876).................................................................................................... 49
P Samuel & Co Ltd v Dumas (1924) .............................................................................................. 132
Page v Scottish Insurance Co Ltd (1929) ........................................................................................ 40
Palamisto General Enterprises SA v Ocean Marine Insurance Co Ltd [1972] .............................. 150
Petersen v Union des Assurances de Paris IARD (1995) ...................................... 149, 150, 160, 161
Petersen v Union des Assurances de Paris IARD (1997) ...................................... 149, 150, 160, 161
Phoenix Assurance Co of Australia Ltd v Liddy (1984) .................................................................. 136
Phoenix Insurance Company of Brooklyn v Erie & Western Transportation Co (1886) ............ 36, 49
Pink v Fleming (1890) .................................................................................................................... 132
PMB Australia Ltd v MMI General Insurance Ltd (2002) ............................................................... 140
Potomac, The v Cannon (1882) ....................................................................................................... 40
Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd & Ors (2005) ........ 161, 164
Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd (2004) .......................... 161
Prime Infrastructure (DBCT) Management Pty Ltd v Vero Insurance Ltd [2004]........................... 161
Prosser & Anor v AMP General Insurance Ltd (2003) ................................................................... 161
QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd (2009) .......................................... 77
Quintano v BW Rose Pty Ltd & Ors (2008) .................................................................................... 120
Randal v Cockran (1748) 1 Ves Sen 98; (1748) .............................................................................. 39
Rejfek v McElrov (1965) ................................................................................................................. 152
Relscher v Borwick (1894) ............................................................................................................. 133
Rhesa Shipping Co SA v Edmunds (The Popi M) (1985) ...................................................... 150, 157
Royston v McCallum & Ors (2006) ................................................................................................... 42
S & Y Investments (No.2) Pty Ltd (in liq) v Commercial Union Assurance
Co of Australia Ltd (1986) ............................................................................................ 120, 134
Samuel & Co Ltd v Dumas (1924).................................................................................................. 160
Santos Ltd v American Home Assurance Co (1986) ....................................................................... 50
Scottish Amicable Heritable Securities Association Ltd v Northern
Assurance Company (1883) ...................................................................................... 76, 80, 91
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Mannings Six Principles of General Insurance
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Mannings Six Principles of General Insurance
Scottish Union & National Insurance Co v Davis (1970) .................................................................. 40
Scottish Union & National v Alfred Pawsey & Co (1908) ....................................... 119, 123, 124, 126
Scripture v Lowell Mutual (1852) .................................................................................................... 131
Sherry v FAI General Insurance Co Ltd (2002)................................................................................ 16
Simpson & Co v Thomson (1877) .................................................................................................... 34
Skandia Insurance Co Ltd v Skoljarev (1979) ................................................................ 149, 157, 158
Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte
Ltd (2009) ............................................................................................................................... 86
Stanley v Western Insurance Co (1868) ................................................................................ 125, 132
State Government Insurance Commission (SA) v Stevens Bros Pty Ltd (1984) ........................... 120
State Government Insurance Commission v Sinfein Pty Ltd (1996) ...................................... 136, 154
State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969).................... 41, 62
State Rail Authority of NSW v Blacktown City Council [1996] ......................................................... 86
Stateliner Pty Ltd v Legal & General Assurance Society Ltd (1981).............................................. 149
Stearns v Village Main Reef Gold Mining Co Ltd (1905) ................................................................. 35
Sutherland Shire Council v Baltica General Insurance Co Ltd (1996) ................................... 120, 134
Switzerland General Insurance Co v Lebah Products Pty Ltd (1983).................................... 134, 136
Sydney Turf Club v Crowley (1971) ................................................................................................. 81
Taylor v Dunbar (1869) .................................................................................................................. 132
Territory Insurance Office v Adlington (1993) ............................................................................ 63, 64
Thobald v Railway Passengers’ Assurance Co (1854) .................................................................... 37
Transport Accident Commission v Hoffman (1989) ....................................................................... 120
Transport Accident Commission v Jewell (1995) ........................................................................... 120
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) ............................................ 44, 84
W Lanslev & Sons Ltd v Australian Provincial Assurance Assoc Ltd (1924) ................................. 157
Waterwell Shipping Inc v HIH Casualty & General Insurance Ltd [1997] ...................................... 159
Wayne Tank & Pump Co Ltd v Employers’ Liability
Assurance Corp Ltd (1974) .......................................... 124, 127, 135, 139, 154, 158, 160, 162
Weddell v Road Transport & General Insurance Co (1931) ............................................................ 83
Werenfridus, Van der Bosch and Van Rootselaar v Brincrest (1993) ............................................ 110
West of England Fire Insurance ................................................................................................. 36, 49
West of England Fire Insurance Company v Isaacs (1897) ....................................................... 36, 49
Wood v Associated National Insurance Co Ltd (1984) .................................................................. 160
Woodside Petroleum Development Pty Ltd & Ors v E&W Pty Ltd & Ors (1999) ....................... 45, 89
Woodside Petroleum Development Pty Ltd v H&R – E&W Pty Ltd (1999) ...................................... 37
Yasin, The v The Al Riaz (1979) ...................................................................................................... 69
Yorkshire Dale SS Co v Minister of War Transport (1942) ............................................................ 131
Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd (1962) ............................................. 37, 38, 50
Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd (1991) .................................................... 15
Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd
(2009) ....................................................................................................... 86, 88, 89, 90, 92, 97
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Mannings Six Principles of General Insurance
INTRODUCTION
“It is essential for the growth of reason that as individuals we should bow to forces
and obey principles which we cannot hope fully to understand, yet on which the
advance and even the preservation of civilization depend.”
Friedrich Hayek (1980)1
The Macquarie Dictionary defines ‘principle’ as: “a fundamental, primary,
or general truth, on which other truths depend”2.
This study of the six principles of general insurance originally started life
as a chapter in my fourth book in the ‘It Will Never Happen to Me’
series: ‘It Happened to Me! A Comprehensive Guide to Managing &
Quantifying a General Insurance Claim’3. Naturally, an understanding
of the underlying principles would be necessary in the lodgement,
management and preparation of any insurance claim. However, while
I appreciated the significance of these principles, it quickly became
apparent, as I researched and wrote up my findings, that the importance of these
tenets was such that they deserved a text in their own right.

Utmost Good Faith

Indemnity

Subrogation

Contribution

Insurable Interest

Proximate Cause
In this study, we explore the history of each principle, including how it has been interpreted and,
where appropriate, how and when it has changed over time. None of the principles are immutable.
Some principles have been supported or altered in some way by the Australian Insurance
Contracts Act 1984 (Cth)4, and any such changes are also discussed.
A thorough understanding of these principles is not just important at the time of a claim, but also
prior to and at the time of entering an insurance contract, and right through the life of the contract.
As such, anyone in general insurance should benefit from reading this Guide. To further assist the
reader, when illustrating a point I have used case studies based on either actual claims I have
been involved in or a court judgement.
1
2
3
4
See chapter titled ‘Conscious Direction and the Growth of Reason’ of Hayek F., 1980, The Counternd
Revolution of Science: Studies on the Abuse of Reason, 2 Edition, Liberty Press, Indianapolis.
The Macquarie Dictionary, Revised 3rd Edition edited by Delbridge A., Bernard JRL., Blair D., Peters P.,
and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.1510.
Manning A., 2010, It Happened to Me!, Mannings of Melbourne, Camberwell.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Introduction
The six underlying principles of insurance included in this study, listed in the order in which they
appear in this Guide, are:
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Mannings Six Principles of General Insurance
When discussing the court cases in this Guide, the reader will notice initials such as ‘J’ or ‘LJ’
following the surname of the judges involved. To clarify, for those who have had little involvement
with the legal profession, these initials indicate the judge’s title. For your convenience, noted below
are the most often used abbreviations in this text.
Abbreviation
Position Title
CJ
Chief Justice
J
Judge / Justice
JA
Justice of Appeal / Appeal Court Judge
LJ
Lord Justice
SC
Senior Counsel
SPJ
Senior Puisne Judge
Much is covered in the Guide and it has been designed to be read cover to cover. However, by using
the index, those sections relevant to a specific situation can also be easily accessed and studied.
Introduction
A work like this does not just happen. I have had great support from a number of people. Sincere
thanks goes to many of my colleagues at the LMI Group in Australia, New Zealand and South
Africa, who have offered invaluable comments based on their years of experience. Invaluable
assistance was provided by Peter O’Brien, LMI Group’s Corporate Counsel who proof-read and
critiqued the work.
David Goodlad of Risk Technologies Pty Ltd, Melbourne, Mike Gaines, of Commercial Claims
Services, and Mr Crossley Gates, Special Counsel with DLA Phillips Fox, Auckland, all selflessly
provided access to their respective libraries, where my own library was found short. Thank you,
gentlemen.
Valuable assistance was also provided by Victoria University, and the Graduate School in
particular. For their help, I am most grateful.
I also wish to record my personal thanks to Wendy Hunter, LMI Group’s Business Operations
Manager, and her assistant, Nastassja Freischmidt, for their assistance in the design and
presentation, research and proof-reading of the text.
REVISION
QUESTIONS
Many readers will be familiar with the ‘Business Interruption Insurance
& Claims’ publication. With each edition of that Guide, additional features
have been included, with the Fifth Edition providing the reader with
revision questions at the end of each chapter, to assist the reader
in testing their understanding. This concept was taken a step further,
with the logic behind the answers being made available to all readers
via a link in the Publications area of the LMI Group website
(www.LMIGroup.com/Publications).
Given the popularity of this feature, we have developed revision questions for this new Guide, and I
would like thank Kelly Flahavin, LMI Group’s Training & Research Assistant, for drafting the
majority of these questions and model answers. The revision questions can be found at the end of
each chapter, with the answers available in the matrix at Chapter 7. We have again provided the
logic behind the answers via the link for this Guide in the Publications area of the LMI Group
website. Please note that while the revision questions are available to all visitors to our website, in
order to access the logic behind the answers you will need to enter a password, which is 094863.
For your convenience, I would explain that the password is the last 6 digits of the number displayed
beneath the barcode on the back cover of this Guide.
Mannings Six Principles of General Insurance
Page
3
At the time of going to print, the Insurance Contracts Amendment Bill 2010 is awaiting ratification
by Parliament. Many of the proposed changes reiterate the provisions of common law and will
create legislative certainty going forward. Others, such as the long overdue clarity on the issue of
the distribution of the proceeds of a recovery action, are foreshadowed in this Guide. Some of the
changes, if implemented, will necessitate minor changes to this text, which should, at all times, be
treated as a guide and a work in progress.
Lastly, a warning: A text such as this should never be solely relied upon for advice. Matters differ
according to their facts, while the law undergoes constant change. You should always seek legal
advice on specific fact situations, as they arise.
I would be extremely pleased to receive feedback regarding the relevance, ease of understanding
and usefulness of the material contained herein, and also any suggestions for improvement. You
may reply via email to allan.manning@LMIGroup.com. It is through such feedback that the Guide
continues to grow with each edition.
Introduction
Dr Allan Manning
Managing Director, LMI Group
Melbourne, 25 February 2010
Page
5
Mannings Six Principles of General Insurance
CHAPTER 1 - THE FIRST PRINCIPLE OF INSURANCE IS
‘UTMOST GOOD FAITH’
“By faith is meant, first, conscious knowledge and, second, the practice of good deeds.”
Bahá'u'lláh (1854)5
We start this examination of the six principles of general insurance with what I regard as the first
principle of general insurance: ‘utmost good faith’. This is, arguably, the most important of all six
principles, being reinforced on the one hand and weakened on the other by the introduction of the
Insurance Contracts Act 1984 (Cth)6. Just how this has occurred is discussed in this chapter, after
the history and prior common law position have been discussed.
1.2 The Principle of Utmost Good Faith
In my view, the most important underlying principle of insurance is ‘utmost good faith’ (uberrima
fides7). Unlike a normal buyer-seller transaction, which is undertaken on the ‘buyer beware’
(caveat emptor) premise, both the insurer and the Insured must show utmost good faith to each
other in their dealings when it comes to insurance. This is a common law position that goes back
well over 240 years to Carter v Boehm (1766)8.
Background to Carter v Boehm
Carter was the Governor of Fort Marlborough, which was
built by the British East India Company in Sumatra,
Indonesia. Carter took out an insurance policy with
Mr Boehm against the fort being taken by a foreign enemy.
A witness, Captain Tryon, testified that Carter knew that
the fort had been built to resist attacks from natives, but not
European enemies, and the French were likely to attack.
The French did attack, and Boehm refused to fulfill the
insurance claim. Carter sued, but failed to have the claim
paid.
5
6
7
8
`Abdu'l-Bahá, Tablets of `Abdu'l Bahá Abbas, Volume III, Bahá'ί Publishing Society, 1909, Chicago.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
The terms uberrima fides and uberrimae fidei, although grammatically distinct in Latin (the latter being the
genitive form), are often used interchangeably in English, particularly in the general insurance industry.
Carter v Boehm (1766) 97 ER 1162.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
1.1 Introduction
Page
6
Mannings Six Principles of General Insurance
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
In that case, the presiding judge, Lord Mansfield, held that Mr Carter) had failed in his duty of
utmost good faith in failing to disclose what he terms ‘material facts’. Lord Mansfield stated:
“Insurance is a contract based upon speculation. The special facts, upon which the
contingent chance is to be computed, lie most commonly in the knowledge of the
Insured only; the underwriter trusts to his representation and proceeds upon the
confidence that he does not keep back any circumstance in his knowledge, to
mislead the underwriter into a belief that the circumstance does not exist, and to
induce him to estimate the risqué as if it did not exist. Good faith forbids either party
by concealing what he privately knows, to draw the other into a bargain from his
ignorance of that fact, and his believing the contrary.”9
[Emphasis mine]
The good judge described ‘misrepresentation’ as “fraud”, and went on to say:
“Although the suppression should happen through mistake, without any fraudulent
intention, yet still the underwriter is deceived and the policy is void; because the
risqué10 run is really different from the risqué understood and intended to be run at
the time of agreement. The policy would be equally void against the underwriter if he
concealed. Good faith forbids either party; by concealing what he privately knows to
draw the other into a bargain from his ignorance of the fact, and his believing the
contrary.”11
[Emphasis mine]
The position that withholding information in respect of general insurance is a breach of utmost good
faith, is a principle upheld in Australia to this day12.
The duty of utmost good faith and the duty of disclosure is not a one-way street. It applies equally
to both parties as both quotes from this case show. Claims staff and loss adjusters need to keep
this firmly in mind. In practice, I have witnessed on far too many occasions an insurer or their
agent, a loss adjuster or solicitor, reminding an Insured of their duty of utmost good faith, but
blatantly breaching this fundamental principle of general insurance themselves.
This common law position is typically reinforced by a condition stated in the policy. While policies
vary a great deal, I take the Australian Mark IV Industrial Special Risks (“ISR”) policy as an
example, as it is an industry standard used to insure many larger risks.
“1.
MISREPRESENTATION AND NON-DISCLOSURE
If the Insured:
9
10
11
12
(i)
failed to disclose any matter which the Insured was under a duty to
disclose to the Insurer(s); or
(ii)
made a misrepresentation to the Insurer(s) before this Policy was
entered into;
Carter v Boehm (1766) 97 ER 1162.
For ‘risqué’ read ‘risk’.
Carter v Boehm (1766) 97 ER 1162.
See BMW Australia Finance Ltd v Miller & Associates Insurance Broking Pty Ltd (2009) VSCA 117.
Mannings Six Principles of General Insurance
Page
7
(a)
the liability of the Insurer(s) in respect of any claim will be reduced to an
amount to place the Insurer(s) in the same position in which the
Insurer(s) would have been placed if such non-disclosure had not
occurred or such misrepresentation had not been made; or
(b)
if the non-disclosure or misrepresentation was fraudulent, the Insurer(s)
may avoid this Policy.”
In the case of claims being considered under Australian law, this policy condition and others like it
have been slightly watered down by the introduction of the Insurance Contracts Act 1984 (Cth)13.
One final point, as was confirmed in CE Heath Underwriting & Insurance (Aust) Pty Ltd v Edwards
Dunlop & Co Ltd (1993)14, is that the renewal process creates a new contract of insurance that is
entered into each year. This is the case if the same insurer simply renews an existing policy, even
with the same policy number. Section 21 of the Insurance Contracts Act 1984 (Cth)15 follows this
approach. However, as will be seen later in this chapter, the insurer’s duty to inform the Insured of
their duty of disclosure is different.
1.3 Utmost Good Faith after the Contract has been Entered Into
The case of Carter v Boehm16 concerned the pre-contractual duty of disclosure. Lord Mansfield
did not consider the duties of the parties to one another after the contract had been made.
Most of the 19th century cases concern breaches of the duty of good faith by reason of
non-disclosure or misrepresentation at the time the contract was made. It was understood to be
the law, however, that there was no obligation on an assured to disclose to the underwriter facts
material to the risk that came to the Insured's knowledge after the contract was made. However,
most insurance policies contain a condition or even a policy exclusion that, in effect, requires the
Insured to advise the insurer of any changes in the risk.
An example, again taken from the Mark IV ISR policy, states:
“2.
ALTERATION
The Insurer(s) shall not be liable for loss, destruction of or damage to any
property insured hereunder caused or contributed to by any alteration after the
commencement of this Policy:
(a)
13
14
15
16
by removal of such Property from the Premises other than as provided
under the terms of Property Exclusion 1;
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
CE Heath Underwriting & Insurance (Aust) Pty Ltd v Edwards Dunlop & Co Ltd (1993) 176 CLR 535;
(1993) ANZ Ins Cas 61-165.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Carter v Boehm (1766) 97 ER 1162.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
and if the Insurer(s) would not have entered into this Policy for the same
premium and on the same terms and Conditions expressed in this Policy but
for the failure to disclose or the misrepresentation, then:
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
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8
Mannings Six Principles of General Insurance
(b)
if the trade or processes of manufacture carried on at the Premises or
whereby the nature of the occupation or other circumstances affecting
the Premises and/or the Insured’s property therein contained shall be
changed in such a way as to increase the risk of loss, destruction or
damage;
(c)
whereby any premises containing any property insured hereunder shall
become unoccupied, and so remain for a period of more than thirty
days; or
(d)
whereby the Insured’s interest ceased except by will or the operation of
law.
Provided that any such alteration, upon coming to the knowledge of the
Insured’s officer responsible for insurance, shall be immediately notified to
Insurer(s) and, if agreed to by the Insurer(s) in writing, an appropriate
additional premium paid if required.”
Again, the position has been watered down in Australia with the introduction of the Insurance
Contracts Act 1984 (Cth)17.
What all this means from an Insured’s point of view is that at claim time, all the information that was
provided will be tested by the insurer to confirm that it was true and correct. This extends to facts
that ought to have been disclosed, but were withheld (either deliberately or innocently) from the
underwriter.
1.4 Principle Continues after the Claim Occurs
Over time, this principle of acting with utmost good faith was extended so that not only does it apply
at the time the insurance is taken out, but right through to claim time. In fact, good faith is
necessary throughout the term of the contract, and includes not only duties of disclosure, but also,
as Lord Haldane stated in British Westinghouse Co Ltd v Underground Electric Railways (1912)18:
“The duty of taking all reasonable steps to mitigate the loss and debars the claimant from claiming
any part of the loss which is due to his neglect to take such steps”. In addition to this duty of
mitigating the loss, all questions asked of an Insured need to be answered honestly, and amounts
claimed need to be as accurate as possible.
Yet again, the common law position is typically reinforced by a condition or perhaps several
conditions in the insurance contract. Following are two examples of conditions from the Mark IV
ISR policy.
“7.
FRAUD
If any claim be in any respect fraudulent or if any fraudulent means or devices
be used by the Insured or anyone acting on the Insured’s behalf to obtain any
benefit under this Policy, or of any destruction or damage be occasioned by
the wilful act or with the connivance of the Insured, the Insurer(s), without
prejudice to any other right (s) the Insurer(s) might have under this Policy,
shall be entitled to refuse to pay such claim.”
17
18
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
British Westinghouse Company v Underground Electric Railways (1912) AC 673.
Mannings Six Principles of General Insurance
“9.
Page
9
INSURER(S) RIGHTS
This condition shall be evidence of the leave and licence of the Insured to the
Insurer(s) so to do. If the Insured or any one acting on the Insured’s behalf
shall not comply with the requirements of the Insurer(s) or shall hinder or
obstruct the Insurer(s) in doing any of the abovementioned acts, then all
benefits under this Policy shall be forfeited. The Insured shall not in any case
be entitled to abandon any property to the Insurer(s) whether taken
possession of by the Insurer(s) or not.”
The first of these two conditions, headed ‘7. Fraud’, has again been altered in Australia by the
introduction of the Insurance Contracts Act 1984 (Cth)19.
The second, as you will have gathered on reading the clause, gives quite a deal of power to the
insurer. The reason for this comes back to the underlying principle of utmost good faith. An insurer
cannot determine everything about a risk at the time the insurance is taken out, and it would be too
costly to the Insured and the public in general, if insurers had to conduct such tests in advance.
However, when a claim occurs, the insurer is entitled to ensure that the information provided to them
at the time the insurance was arranged was correct, as it was on this information that they based
their decision to accept the risk, the premium to be charged, any excess/deductible and/or other
conditions to be imposed; and made decisions that might otherwise have been affected by false
information.
Further, an insurer needs to know the cause of a loss. This is important for several reasons:
19
20
(i)
Is the loss covered by the contract of insurance?
(ii)
Is there a right of recovery from any third party?
(iii)
Has the Insured deliberately caused the loss?20
(iv)
Has there been any misrepresentation of the risk?
(v)
Has there been any alteration of the risk?
(vi)
What was the value of the risk?
(vii)
What is the extent of the damage and the interruption?
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Whilst this may be addressed under reason (i), I felt it warranted a point of its own.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
On the happening of any loss, destruction or damage in respect of which a
claim is or may be made under this Policy the Insurer(s) and every person
authorised by the Insurer(s) may, without thereby incurring any liability, and
without diminishing the right of the Insurer(s) to rely upon any Conditions of
this Policy, enter, take or keep possession of any building or premises where
the loss, destruction or damage has happened and may take possession of or
require to be delivered to the Insurer(s) any of the property hereby insured
and may keep possession of and deal with such property for all reasonable
purposes and in any reasonable manner.
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10
Mannings Six Principles of General Insurance
This condition gives the insurer the power to carry out enquiries and to ask all relevant questions
so as to address all the points raised above. The condition contains an onerous provision in the
Mark IV ISR policy, as the insurer can do this “without thereby incurring any liability”. In the Mark V
ISR policy, this was changed to read more appropriately “without thereby admitting liability”. These
two sub-clauses have significantly different meanings.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
The bottom line is that false or grossly exaggerated claims are viewed as fraud by the insurance
industry, and every effort will be made to resist such claims to the full extent of the criminal and civil
law. This means that an Insured should not exaggerate a claim and should provide all the
information that an insurer reasonably requires to determine its liability and the amount of the claim
payable.
1.5 Similar Rules Apply in a Recovery Action
A similar situation arises in any recovery action. That is, where one party is seeking to recover
damages from another party in a court of law. It is imperative that anyone going to court goes
before a judge ‘with clean hands’.
All information in relation to the matter should be provided honestly, and any attempt to hide
important information from the court by any party may well result in that party, whether it be
plaintiff, defendant or witness, losing all or substantial credibility with the court.
1.6 Put Yourself in ‘Their Shoes’
In the Pulitzer Prize winning novel, To Kill a
Mockingbird21, Atticus Finch explains to his daughter
Jean Louise (Scout)22: “You never really understand a
person until you consider things from his point of view –
until you climb into his skin and walk around in it”. This is
sage advice to us all.
During a claim, an Insured or plaintiff should put
themselves in the position of the other party (in this case,
the insurer) and consider what information they would
reasonably need in order to have comfort in writing a
cheque in settlement. From this viewpoint, you can appreciate that any insurer requires a
reasonable degree of certainty as to the cause of the loss when determining whether the loss falls
within the scope of the cover afforded by the policy and the amount claimed is fair and reasonable.
As such, the more supporting documentation an Insured can provide, the faster a claim will be
processed.
Again, it is not all a one-way street and the questions posed by an insurer or their agent, such as a
loss adjuster, investigator or lawyer, need to be relevant.
21
22
Lee H., 1960, To Kill a Mockingbird, JB. Lippincott & Co, Philadelphia.
Photograph from the Universal Pictures film of the same name starring Gregory Peck as Atticus Finch (for
which he won the Academy Award for best actor) and Mary Badham as Scout.
Mannings Six Principles of General Insurance
Page
11
1.7 Principle Reinforced by Statute
In the case of Australia, these old rules or principles on which
insurance is based have been retained, albeit slightly modified, by the
introduction of the Insurance Contracts Act 1984 (Cth)23.

Section 13: The Duty of Utmost Good Faith

Section 48: Entitlement of Named Persons to Claim

Section 56: Fraudulent Claims

Section 28: General Insurance
For the reader’s convenience, these sections are each reproduced and commentary follows.
1.7.1 Section 13 of the Insurance Contracts Act 1984 (Cth)
“13
The duty of utmost good faith
A Contract of insurance is 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.”
While this section of the Insurance Contracts Act 1984 (Cth)25 clearly states that “each party” to
the contract of insurance will act with “utmost good faith” (which, as we have seen, was the
traditional position, in practice, since its introduction), the duty of utmost good faith appears, even
to the courts themselves26, to be more favourable to the Insured than the insurer.
1.7.2 Insurance Contracts Amendment Bill 2010: Proposed Amendments
In terms of the proposed amendments to the Insurance Contracts Act 1984 (Cth)27, the duty of
good faith will be extended to apply to third party beneficiaries (ie. persons who enjoy cover under
the policy but who did not themselves contract directly with the insurer).
A breach of the duty by an insurer will result in a breach of the Insurance Contracts Act 1984
(Cth)28 and allow the Australian Securities & Investments Commission (“ASIC”) to bring a
representative action, or take action under the Corporations Act 2001 (Cth)29 for such a breach.
23
24
25
26
27
28
29
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008. A copy of this Act can be obtained from www.comlaw.gov.au.
Ibid.
Ibid.
Barbaro v NZI Insurance Australia Ltd (1994) SADC D3073 (Unreported, Wilson J., 17 May 1994).
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Ibid.
Corporations Act 2001 (Cth), Act No. 50 of 2001 taking into account amendments up to Act No. 103 of
2010.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
Of particular importance are the four sections of the Act24 listed below.
Page
12
Mannings Six Principles of General Insurance
As far as remedies in civil litigation are concerned, this amendment represents a legislative
endorsement of the existing common law. However, a breach of the Insurance Contracts Act 1984
(Cth)30 could now result in ASIC suspending or terminating an insurer’s licence. The reality is that
representative actions by ASIC, whereby they intervene at the request, or on behalf, of aggrieved
Insureds, are likely to constitute rare occurrences with the bulk of aggrieved Insureds opting for
recourse by way of civil litigation.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
1.7.3 Section 48 of the Insurance Contracts Act 1984
In view of Section 48, there is more certainty as to whether the duty of utmost good faith applies to
all persons who wish to benefit from the policy, or just the named Insured. For the convenience of
the reader, Section 48 of the Insurance Contracts Act 1984 (Cth)31 is reproduced below.
“48
Entitlement of named persons to claim
(1)
Where a person who is not a party to a contract of general insurance is
specified or referred to in the contract, whether by name or otherwise,
as a person to whom the insurance cover provided by the contract
extends, that person has a right to recover the amount of that person’s
loss from the insurer in accordance with the contract notwithstanding
that the person is not a party to the contract.
(2)
Subject to the contract, a person who has such a right:
(a)
has, in relation to the person’s claim, the same obligations to the
insurer as the person would have if the person were the insured;
and
(b)
may discharge the insured’s obligation in relation to the loss.
(3)
The insurer has the same defences to an action under this section as
the insurer would have in an action by the Insured.
(4)
[Omitted by Act No. 5 of 1995]
(5)
[Omitted by Act No. 5 of 1995].”
This section and Section 20 of the Act32 override the common law requirement for a person to be a
party to a contract of general insurance to be able to claim on (that is, enforce) the contract. Now, a
person who is not a party to the contract but who is referred to in the insurance contract, can claim.
However, that person has the same obligations to the insurer(s) as if they were the Insured.
Furthermore, due to Section 48(2)(b), that person can discharge the Insured’s obligations in
relation to the loss. Similarly, due to Section 48(3), the insurer can employ the same defences
against the unnamed party that it would use against the named Insured33.
30
31
32
33
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Ibid.
Ibid.
For further discussion on the Insurance Contracts Act 1984 (Cth), I would direct you to the following two
publications: Sutton K., 1991, Insurance Law in Australia, 4th Edition , The Law Book Company Ltd,
th
Sydney; and, The Insurance Contracts Act Handbook 1984, 6 Edition, 2008, Minter Ellison Lawyers,
Sydney.
Mannings Six Principles of General Insurance
Page
13
Most general insurance policies stipulate that it is necessary for the Insured to disclose the nature
and extent of a third party's interest at the time of notification of the claim. Despite a policy
stipulating this, Section 48 of the Insurance Contracts Act 1984 (Cth)34 would not preclude the
third party from enforcing entitlement, due to the fact that the disclosure in the business records of
the Insured and the disclosure by the Insured at the time of notifying the claim, are not conditions
precedent to an entitlement under Section 48 of the Insurance Contracts Act 1984 (Cth)35.
1.7.4 Section 56 of the Insurance Contracts Act 1984
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 the
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 a 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.”
As mentioned earlier, until the Insurance Contracts Act 1984 (Cth)36, many insurers treated a
breach of utmost good faith and/or fraud as a very serious matter, and would not just refuse to pay
a claim and/or cancel the policy from the date of the claim or the fraud, but the insurer would
cancel the policy ab initio (from the inception date of the policy) and would treat the policy as never
having been in force. This of course meant a refund of the full insurance premium. At the same
time, an Insured would have to refund any claims already paid, even if they occurred at an earlier
time.
As can be seen on reading Section 56, the remedy now available to an insurer, if either the
Insured or someone acting on the Insured’s behalf makes a fraudulent claim, is to:

refuse to pay the claim as per Section 56(1); or

cancel the policy from the date of the claim (no full return of premium and no
repayment of earlier claims) as per Section 60(1)(e).
Having said this, the Insured is entitled to challenge this in accordance with Section 56(2).
A couple of interesting issues arise. Firstly, what is a little bit of fraud? That is, when would it be
harsh or unfair to refuse to pay a claim? Secondly, what happens if one Insured is committing the
fraud and another is innocent and knows nothing of the fraud, and yet has a legitimate claim in
their own right? This latter situation can be quite difficult to determine, particularly where the
interests of the parties are neither joint nor interwoven, but rather are separate and distinct.
34
35
36
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Ibid.
Ibid.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
“56
Page
14
Mannings Six Principles of General Insurance
When an insurer reaches the point where they believe a claim is fraudulent, it is naturally quite
serious and it would be prudent for both parties to seek their own legal advice on the particular
circumstances.
The Insurance Contracts Act 1984 (Cth)37 is not, however, all in the Insured’s favour, and
Section 28 (reproduced below) needs to be kept in mind.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
1.7.5 Section 28 of the Insurance Contracts Act 1984
“28
General insurance
(1)
This section applies where the person who became the insured under a
contract of insurance upon the contract being entered into:
(a)
failed to comply with the duty of disclosure; or
(b)
made a misrepresentation to the insurer before the contract was
entered into;
but does not apply where the insurer would have entered into the contract
for the same premium and on the same terms and conditions even if the
insured had not failed to comply with the duty of disclosure or had not
made the misrepresentation before the contract was entered into.
(2)
If the failure was fraudulent or the misrepresentation was made
fraudulently, the insurer may avoid the contract.
(3)
If the insurer is not entitled to avoid the contract or, being entitled to avoid
the contract (whether under subsection (2) or otherwise) has not done so,
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 had not occurred or the misrepresentation had not been made.”
In cases of general insurance, a non-disclosure or a misrepresentation by the Insured allows the
insurer the right, under Section 28, to either avoid the contract or reduce its liability to the Insured
depending on the classification of misrepresentation.
Fraud
In cases of fraud, the insurer has the right to avoid the contract of insurance, but this is subject to
Section 31, titled ‘Court May Disregard Avoidance in Certain Circumstances’. In Section 31, the
court has an overriding power to disregard the insurer’s rights, which of course significantly dilutes
the rights of an insurer under Section 28. A court may exercise this power if:
37
(i)
it is harsh and unfair to allow the insurer to avoid the policy;
(ii)
the insurer has not been prejudiced or has only been prejudiced to a minimal or
insignificant extent; or
(iii)
having regard to the need to deter fraudulent conduct in relation to insurance and,
after balancing the culpability of the Insured and the magnitude of the loss, the Insured
would suffer if the insurer’s avoidance of the policy was not disregarded.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Mannings Six Principles of General Insurance
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15
Under Section 31(3)(b) the court may also disregard the avoidance in relation to any other relevant
matter38.
Non-Disclosure or Misrepresentation
Turning back to Section 28 of the Insurance Contracts Act 1984 (Cth)39, if the Insured’s
non-disclosure or misrepresentation was innocent, then the insurer has to prove just how much it
has been prejudiced by the non-disclosure or misrepresentation. The insurer needs to prove that if
they had known the true position, they would have imposed different conditions and/or charged an
extra premium40. This duty of proof may extend to having to provide, during discovery,
underwriting guidelines, procedure manuals and/or similar proposals showing acceptance or
rejection41. This has been done successfully by underwriters in several cases, and so the earlier
advice to make full disclosures remains sound.
The extent of the duty to disclose may be affected by the nature and extent of the questions
specifically posed by an insurer when considering whether or not to accept the risk and, if so, on
what terms. In particular, a loosely worded disclosure form could result in the insurer being
confined to the terms of reference raised in the document. For example, an insurer that enquires
after an Insured’s claims history may be precluded from raising the Insured’s losses that were not
the subject matter of claims submitted to an insurer.
Having proved that they have been prejudiced by a non-disclosure, the insurer’s liability is reduced
to the amount liable to be paid had the non-disclosure or misrepresentation not occurred. There is
no prescribed formula or axiomatic method by which the claim is reduced. The Insured is
ultimately at the mercy of the court’s discretion as to a fair and pragmatic reduction of the claim,
taking into account the facts and merits of the matter. This is the same concept that forms the
basis of the measure of damages applied in tort42. The amount of the reduction can go as high as
100% of the amount claimed43. It is, however, important that the insurer be able to prove that it
would not have accepted the risk if there had been accurate disclosure44.
In Advance (NSW) Insurance Agencies Pty Ltd & Anor v Matthews & Anor (1989)45 the High Court
of Australia found that the remedies available to an insurer under Section 28 of the Insurance
Contracts Act 1984 (Cth)46 apply where one co-insured has failed to disclose a material fact,
notwithstanding that another Co-insured did not know of the non-disclosure.
38
39
40
41
42
43
44
45
46
Minter Ellison Legal Group, 1998, The Insurance Contracts Act 1984, The Insurance (Agents and Brokers)
Act 1984 and their Regulations, A Handbook, Minter Ellison Lawyers, Sydney, p.48.
Ibid.
Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd (1991) 2 VR 146; (1990) 6 ANZ Ins Cas 60-984.
Bauer Tonkin Insurance Brokers v CIC & Ors (1995) 9 ANZ Ins Cas 61-298.
Minter Ellison Legal Group, 1998, The Insurance Contracts Act 1984, The Insurance (Agents and Brokers)
Act 1984 and their Regulations, A Handbook, Minter Ellison Lawyers, Sydney, p.42.
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd & Anor (1991) 22 NSWLR 389;
(1991) 6 ANZ Ins Cas 61-042.
McNeill v O’Kane; sub nom (2002) QSC 144; (2003) 12 ANZ Ins Cas 61-559.
Advance (NSW) Insurance Agencies Pty Ltd & Anor v Matthews & Anor (1989) 166 CLR 606; (1989) 5
ANZ Ins Cas 60-910.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
Although the distinction between misrepresentation and non-disclosure is not always clear-cut and
in many cases the two overlap, as a general rule a misrepresentation is usually directed at a
misstatement of fact as opposed to a failure to disclose material information.
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Mannings Six Principles of General Insurance
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
This position, however, depends on the wording of the policy, which can be modified by the insurer
to protect innocent Insureds47. This is the case with the Mark V ISR policy at Sub-clause 7.1.2,
which I reproduce as a good example, below.
“7.1.2 Where the separate interests of more than one Co-Insured in the Property
Insured are insured under this Policy, any act or neglect of one Co-Insured will
not prejudice the rights of the remaining Co-Insured; provided that the
remaining Co-Insured shall, within a reasonable time after becoming aware of
any act or neglect whereby the risk of loss, damage or destruction has
increased, give notice in writing to the Insurer and shall on demand pay such
reasonable additional premium as the Insurer may require.”
1.7.6 Case Study: Aon Risk Services v ANU
Section 28 of the Insurance Contracts Act 1984
(Cth)48 was relied upon in a matter49 arising from the
2003 Canberra Bushfires.
The case under review involved the Stromlo
Observatory. The Insured, via their broker, had
declared the asset value of the property at the
Mt Stromlo Observatory at approximately $15 million.
Following the property being razed during the
bushfires, a claim was submitted for approximately
$80 million. The ISR policy in force was not subject to
any test for Co-insurance or Average, and the Limit of
Liability was insufficient to cover all the losses
sustained by the Insured.
The insurer argued that had the Insured disclosed the true value of the assets they owned at
inception of the policy, the insurer would have sought and obtained reinsurance protection. Most
importantly, the insurer had underwriting guidelines to support their position. The insurer therefore
refused to pay more than the declared value on the basis of Section 28(1)(b), which refers to the
position where an Insured “made a misrepresentation to the Insurer before the contract was
entered into”50.
Three days into the court case, the Insured accepted an undisclosed offer allegedly very close to
the amount of the declared value and substantially less than the loss amount. The Insured then
sought damages from their insurance broker51.
47
48
49
50
51
Sherry v FAI General Insurance Co Ltd (2002) 217 LSJS 207; 12 ANZ Ins Cas 61-516.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Aon Risk Services Australia Ltd v Australian National University (2009) HCA 27.
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
See Aon Risk Services Australia Ltd v Australian National University (2009) HCA 27. The Insured failed in
their case against the broker due to the way the case was managed despite, in the words of the judge, the
issues being “fairly arguable”.
Mannings Six Principles of General Insurance
Page
17
1.8 Can You be more Honest than Honest?
At the time of writing, LMI Group is setting up an office in South Africa, and I take this country as
an example of a jurisdiction in which the term ‘utmost good faith’ (uberrima fides) has been
challenged in the courts. South Africa has a hybrid or mixed legal system, consisting of the
interweaving of a number of distinct legal traditions: a civil law system inherited from the Dutch; a
common law system inherited from the English; and an indigenous law system inherited from
indigenous Africans (often termed African customary law). These traditions have had a complex
interrelationship, with the English influence most apparent in procedural aspects of the legal
system and methods of adjudication, and the Roman-Dutch influence most visible in its
substantive private law52.
As a general rule, South Africa follows English Law in the areas of Procedural Law, Company Law
and the Law of Evidence; while Roman-Dutch Common Law is followed in the South African Law
of Contract, Law of Delict (tort), Law of Persons, Law of Things, Family Law etc. With the
commencement of, firstly, the interim Constitution and then its replacement, the 1996 Constitution,
another strand has been added to this weave. Much of the insurance common has its origin in
English law.
In the 1985 case of Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality (1985)53,
Joubert JA said54:
“In my opinion uberrimae fidei55 is an alien, vague, useless expression without any
particular meaning in law. As I have indicated, it cannot be used in our law for the
purpose of explaining the juristic basis of the duty to disclose a material fact before
the conclusion of a contract of insurance. Our law of insurance has no need for
uberrimae fides and the time has come to jettison it.”
Millar JF56 added:
“The need for honest disclosure of known facts relative to and material to the risk, in
the interest of fairness to the insurer, has been recognised for very many years...The
words ‘uberrimae fidei’ must not, of course, be taken too literally. One may be less
than honest but one cannot be more honest than honest...Only ‘material’ facts are
required to be disclosed but in the course of the years problems have arisen
regarding the proper test of materiality.”
52
53
54
55
56
Du Bois F., 2007, Wille's Principles of South African Law, 9th Edition, Juta & Co, Cape Town.
Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A).
At 433 E-F.
Uberrimae fidei is the genitive form of uberrima fides, a Latin term meaning ‘utmost good faith’.
At 443 C-E.
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
This is a question that was answered in the negative by a court in South Africa. While the principle
of utmost good faith is generally accepted in jurisdictions based on English Law, it is not accepted
in all jurisdictions.
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Mannings Six Principles of General Insurance
In this case, the judge went on to set out the nature of disclosure applicable in South Africa in the
following terms57:
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
“It is part of our law that a person making a proposal for insurance is under a duty to
disclose to the insurer material facts of which he has knowledge – material, that is,
to the question of ‘estimating the risk’, which in turn would involve the question of
acceptance or refusal of the proposed insurance and, in the case of acceptance, the
question of the premium to be charged... It has long been recognised and accepted
by this Court as being part of our law.”
In dealing with the issue of non-disclosure, the highest court in South Africa effectively found that
“there are no degrees of good faith”58 and the distinction between utmost good faith and good faith
is without foundation in civil law, in particular, Roman-Dutch common law. Interestingly, in England,
the House of Lords has also suggested that “[t]he concept of uberrima fides does not appear to
have derived from civil law and it has been regarded as unnecessary in civilian systems”59.
Notwithstanding the comments in Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality
(1985)60, the court did not set out the requirements of good faith (as opposed to utmost good faith)
and past authorities dealing with the concept of utmost good faith must still be consulted for
guidance61.
The judge went on to say62:
“The object of devising a means or criterion for determination of the materiality of
undisclosed facts must surely be to ensure, as far as is possible, that justice is done
to both parties. The insurer is to be protected against non-disclosure which could
gravely prejudice him but at the same time the Insured ought not be unfairly required
to forfeit his rights under a policy which he entered into in good faith in accordance
with his (objectivity regarded) reasonable belief that all that was material had been
disclosed.”
On the face of it, while the courts in South Africa argue that you cannot be more honest than
honest, which makes sense, the underlying principle of full disclosure of material facts is still
required.
A more detailed analysis of South African law or that of any other jurisdiction is outside the scope
of this text.
57
58
59
60
61
62
At 442 F-H.
Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A).
Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (“The Star Sea”) (2001) Lloyd’s Rep 389 (HL) 392.
Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A).
Reynecke MFB., Van der Merwe S., Van Niekerk JP. and Havenga P., 2002, General Principles of
Insurance Law, LexisNexis Butterworths, Durban.
At 445 D-F.
Mannings Six Principles of General Insurance
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19
1.9 Summary of Chapter
In this chapter we highlighted one of the most important underlying principles of general insurance,
namely the principle of utmost good faith.
This means the Insured needs to make a full disclosure and answer all questions honestly at the
time the insurance is taken out and certainly not withhold any facts that would influence a prudent
underwriter in accepting the risk and, if so, on what basis.
A renewal is simply the commencement of a new contract that succeeds the previous contract,
which has expired through the effluxion of time. Although it is sometimes argued that the duty of
disclosure is diminished during the policy’s currency and at renewal, as opposed to at the
inception of the contract, the better view is that there is an ongoing duty of disclosure that persists
for the duration of the policy. In this regard, many policies stipulate that the duty to disclose applies
at inception, renewal and thereafter.
The principle continues at claim time. Honest answers must be given to all reasonable questions
and all supporting documents, as is reasonably required by the underwriter or their agent, must be
supplied.
I take the liberty of modifying a 16th century English proverb to stress what this chapter is really all
about: “Honesty is the best policy–where insurance is involved”64. It is not ‘let the buyer beware’
but ‘uberrima fides’65. This is the case, even in jurisdictions such as South Africa where on the
face of it, uberrima fides has been challenged.
Most importantly, it must be remembered that this is not a duty imposed on just the Insured, but by
all parties to the contract. Insurers and their agents, such as loss adjusters, need to fully
appreciate that the duty of utmost good faith applies to them as well as to the Insured, arguably to
a higher degree than is applied to the Insured.
In the next chapter, I move on to the second underlying principle of insurance: the principle of
indemnity and after that the third and closely related principle of subrogation. The principles of
contribution, insurable interest and proximate cause constitute the remaining six principles of
general insurance.
63
64
65
Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73
of 2008.
Sometimes, although far less frequently, written in its Latin form: caveat emptor. For further explanation,
see Manning A. and Manning SA., 2010, Manning’s Dictionary of Insurance, Law & Risk: The Essential
Desk Reference for the Insurance Professional, Mannings of Melbourne, Camberwell.
A Latin phrase meaning ‘utmost good faith’ (literally, ‘most abundant faith’).
Chapter 1 - The First Principle of Insurance is ‘Utmost Good Faith’
This duty applies to all parties, Insured and insurer and even though the principle has been
watered-down in favour of the Insured following the introduction of the Insurance Contracts Act
1984 (Cth)63, it is prudent for all parties to act with utmost good faith with each other.
Page
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Mannings Six Principles of General Insurance
THE AUTHOR
Professional Qualifications
Dr Allan Manning
DBA, MBA, B.Com, FCPA, ANZIIF (Fellow) CIP,
FCII, FCILA, FUEDI
Doctor of Business Administration
Master of Business Administration
Bachelor of Commerce
Fellow Certified Practising Accountant
Fellow Aust & NZ Institute of Insurance & Finance
Fellow Chartered Insurance Institute (UK)
Fellow Chartered Loss Adjuster
Fellow Chartered Institute of Loss Adjusters (UK)
Chartered Insurance Practitioner (UK)
FUEDI European Loss Adjusting Expert
Professional Experience
the Author
After 11 years’ experience with General Accident Insurance, Allan joined Robins MBS Loss Adjusters in 1981.
In 1987, he transferred to Papua New Guinea, as Managing Director. During this time, Allan handled one of
Australia's largest claims, which surrounded the closure of the Bougainville Copper Ltd mine. The claim had a
reserve of US$1,000 million. Allan returned to Australia in 1990 as State Manager, Western Australia and, in
1991, was appointed State Manager for the Southern Region, in addition to heading up GAB Robins’ loss
adjusters national large loss claims team.
Allan founded the LMI Group in 1999; a firm dedicated to providing a high level of customer service and
technical expertise in pre- and post-loss insurance services. Allan created the concept of the highly popular
LMI PolicyComparison, which is a web-based training and comparative tool for the insurance industry; together
with LMI BICalculator, an online service that assists in setting an accurate business interruption sum insured;
and the business continuity management system, LMI ContinuityCoach. Allan’s most recent brainchild is an
expert system for ISR insurance in the form of LMI PolicyCoach.
For over 40 years, Allan has managed large and complex losses involving major property, business interruption
including advanced consequential loss, fidelity, construction and liability throughout Australia, Asia Pacific, Europe
and North America. Assignments have been completed for many multi-national companies, as well as government
organisations and small to medium-sized businesses. Allan particularly enjoys the challenge of assisting companies
to return to normal trading after a major crisis. His interest in the survival of a business following an insured loss
prompted him to complete a Doctoral thesis, following 6 years of extensive research.
Since 1983, Allan has acted as an expert witness, primarily handling quantum and policy response issues. Over
the past 12 years, he has carried out risk analyses, review of insurance programs, and development of business
continuity plans. His lifetime of experience in managing major losses proves invaluable in this area.
Dr Manning has lectured at RMIT on claims management, and has delivered over 800 seminars on various
topics including risk management, ISR policies, and business interruption. He holds the post of Research
Fellow with Victoria University in the faculty of Business & Law's Graduate School of Corporate Governance,
and is the author of five books on insurance.
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