Turkalert court of appeal overturns finding that reckless indifference constituted fraudulent misrep

Priya Paquet & Millie Teh | September 2013 | Insurance & Financial Services | Commercial Disputes and Transactions

TurkAlert

Court of Appeal overturns finding that reckless indifference constituted fraudulent misrepresentation

Summary

Background/Facts

The NSW Court of Appeal has overturned a decision of the NSW Supreme Court which found pre-contractual fraudulent misrepresentation in a proposal for a trade credit insurance policy. The Court of Appeal found that the primary judge’s reasons did not justify a finding of ‘reckless indifference’ to the truth by the insured, absent an examination of their intent.

Atradius issued a trade credit insurance policy to the appellants, Prepaid Services (PPS), Optus and Virgin Mobile. The policy insured trading debts owed to the appellants by Bill Express Ltd (BXP), being a supplier of pre-paid mobile phone sim cards, in the event that BXP became insolvent and was unable to pay its business debts.

Other aspects of the lower court judgment were not disturbed.

BXP did in fact become insolvent which led the appellants to make a claim on the policy. However, Atradius avoided the policy under s28(2) of the Act on the basis of fraudulent misrepresentations in the proposal for the policy. The appellant issued proceedings challenging the avoidance.

The decision confirms the significant burden insurers face in sustaining an avoidance of a policy for fraud under s28(2) of the Insurance Contracts Act 1984 (Cth) (the Act) and highlights that when it comes to proving fraud in the proposal, insurers must be able to prove the necessary mental intent of the person alleged to have provided the fraudulent answer.

The primary judge found in favour of Atradius on the basis that the answers provided by a senior commercial manager of PPS, who completed the answers in the proposal for the policy, were provided with ‘reckless indifference to their truth or otherwise’ and were thus fraudulent.

This initial decision of June 2012 was the subject of a TurkAlert in July 2012. For the full background and findings of the primary judge please click on the link to the July 2012 TurkAlert.

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Implications

The Court of Appeal upheld various aspects of the primary judgment which are not presently relevant to this Alert.

The decision serves to remind insurers that establishing fraud under the Act is a particularly difficult task and that even success in primary proceedings is no guarantee of success on appeal. Insurers who avoid policies under s28(2) of the Act need to remember that fraud is always ‘in the mind’ and that evidence obtained to establish fraud must relentlessly go to proving the insured’s state of mind at the relevant time.

Significantly, the Court of Appeal set aside the primary judge’s decision with respect to a finding of fraudulent misrepresentation by the insured. The Court of Appeal found that the primary judge did not address the critical question of whether or not the insured was ‘consciously’ indifferent to the truth because the primary judge did not consider his intention and state of mind when completing the proposal.

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Prepaid Services & Ors v Atradius [2012] NSWSC 608

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Trade Credit insurance is an insurance policy to protect entities from

loss arising from credit risks such as protracted default, insolvency or bankruptcy of debtors.

The Court of Appeal also held that it had not directly been put to the senior commercial manager at trial that he was indifferent to the truth or otherwise of the relevant answers, namely that he did not care whether the answers were true or not. As there was evidence that he did care that some of the answers were correct, it was not open to the primary judge to make a finding of fraud based upon conscious indifference.

Finally, given that the alternative argument by Atradius, being a reduction of liability to nil under s28(3) of the Act, remained alive, the Court of Appeal remitted this issue back to the primary judge for determination.

TurkAlert

The Appeal

For more information, please contact: Priya Paquet Senior Associate T: 02 8257 5729 M: 0434 115 260 priya.paquet@turkslegal.com.au

Millie Teh Senior Associate T: 02 8257 5722 M: 0417 497 459 millie.teh@turkslegal.com.au

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