by Patrick Coetsee
The whole purpose of having insurance is so that you are covered in the event things go wrong. Whether it's insurance for your home and contents, or a business worth millions of dollars we expect insurance to cover us. However what if you didn't tell the insurer 'the whole truth and nothing but the truth' when we signed up? Does the insurer still have to pay up or can they get out of indemnifying your loss?
In a recently decided case of Prepaid Services v Atradius (no 2) [2014] NSWSC 21 the New South Wales Supreme Court had to decide these very questions.
The Atradius Case
According to the facts in this case, Atradius Credit Insurance NV (Atradius) issued a trade credit insurance policy to a number of pre-paid mobile service providers including Prepaid Services, Optus Mobile Pty Limited, and Virgin Mobile Australia Pty Limited (collectively known as "the plaintiffs").
Atradius insured the plaintiffs on 24 August 2007 indemnifying them against any failure by one of their customers, Bill Express Ltd, to meet payment obligations during the policy period.
Sometime between 1 August 2007 and 1 August 2008 Bill Express Limited became insolvent, which meant that the plaintiffs were not paid. Naturally, the plaintiffs lodged a claim for payment under the insurance policy. However, the insurer declined to pay. Atradius denied liability under the policy on the basis that the plaintiffs had failed to disclose certain information at the time the policy was taken out, fraudulently or otherwise, and misrepresented matters in relation to Bill Express Ltd's trading history to them.
The plaintiffs took Atradius to court. Initially they claimed that Atradius owed them "in excess of $62 million", however under the policy Atradius was only liable for "a maximum of $27 million".
Atradius argued that the plaintiffs were not completely truthful or honest when they took out the insurance, and that if Atradius had known the real financial situation of Bill Express Ltd they would never have insured them, thus they shouldn't be made to pay up.
The Outcome
During the trial it was accepted that the plaintiffs had made at least one innocent misrepresentation.
The plaintiffs knew Bill Express Ltd had a questionable financial standing but never told their insurer. At least, they never openly disclosed their concerns when the insurer specifically asked about it.
Justice McDougall had to consider whether, based on section 28(3) of the Insurance Contracts Act, Atradius was entitled to reduce its liability under the policy to nil, on the basis of a misrepresentation that was "non-fraudulent". His Honour came to the conclusion that if the insurer had known the real financial story of Bill Express Ltd the plaintiffs would have been "a buyer that Atradius did not want to insure" and that, based on his findings, Atradius was entitled to reduce its liability to nil.
Implications For You
While we may not all be dealing with insurance policies worth a cool $27 million or so, this decision highlights the importance of making complete and accurate disclosure and representations when entering into any policy of insurance.
Ultimately, if you want to be covered by an insurance policy, you need to make sure that you have provided complete and accurate responses to the insurer!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
