When is a contract of insurance formed?
April 23, 2012
Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd & Anor  VCS 467 (21 September 2011)
In this case, the Supreme Court of Victoria determined that even where no written policy is prepared, no invoice issued and no premium is paid, a contract of insurance may still exist.
Leading Synthetics Pty Ltd (‘Leading Synthetics’) supplied synthetic resins to customers on 60 day payment terms. Signum Synthetics (‘Signum’) was one such customer.
In late 2007, Leading Synthetics had growing concerns that a number of its customers, including Signum, may fall into arrears amidst the start of the global financial crisis. In an effort to reduce its credit risk exposure, Leading Synthetics instructed its insurance broker to obtain credit risk insurance.
A few days prior to 28 April 2008, the broker sent a document to the insurer entitled, ‘Indication of Terms’ which stated that the terms of the policy were provided without commitment on the part of the insurer until such time as the insurer provided written confirmation that they were on risk for the transaction and agreed to issue a policy.
By 28 April 2008, all the essential terms of the contract of insurance had been agreed between the broker and insurer. The broker had agreed on behalf of the insured that the policy should commence, retrospectively, from 28 April 2008.
On 5 May 2008, the broker sent a further email to the insurer outlining the status of the six different credit risk covers, including the Signum cover, that had been under negotiation, and sought confirmation that the insurer was of the same understanding. In relation to the Signum risk cover, the broker wrote:
‘Cover placed awaiting outcome on others prior to processing.’
The broker responded by addressing the other risk covers but did not mention the Signum cover.
In November 2008, Signum was placed into liquidation at which time it owed the insured approximately $2.265 million.
The insured instituted proceedings against the insurer for indemnity alleging that a contract of insurance had been made and, alternatively, the insurer was estopped from denying such a contract was formed due to the email of 5 May 2008. In the event that these arguments failed, the insured sought damages from the broker for failing to obtain cover.
The insurer raised the following arguments in its defence:
- There was no binding agreement because it had not provided a written policy nor had it agreed to issue a policy to the insured
- The insured had breached Section 21 of the Insurance Contracts Act 1984 (Cth) by failing to disclose matters concerning Signum’s payment history so that liability should be reduced to nil, because it would not have entered the risk had such matters been disclosed
- Liability was excluded under the automatic stoppage of cover provision of the policy because Signum owed a prior debt of $957 at the time of inception of the policy.
The Court concluded that despite the non payment of a premium and the absence of a written policy, a contract of insurance had been formed on 28 April 2008.
In determining whether a contract had been formed, the Court considered the objective intentions of the parties to create legal relations, including consideration of what was known to the parties and what was written, said and done.
The Court accepted the insured’s estoppel argument because:
- The broker and insured assumed that the insurance had been placed
- The insurer induced the assumption held by the broker and insurer that the insurance had been placed by failing to respond to the Signum risk after the email on 5 May 2008
- The insured refrained from obtaining other insurance because of its assumptions
- The insurer knew (or ought to have known) that the insured would refrain from obtaining other insurance because of its assumptions
- The insured’s failure to obtain other insurance caused it detriment.
Reduction of liability due to non disclosure by insured
The Court did not accept that the insured had failed to comply with its duty of disclosure for the following reasons:
- The insured did not know or ought to have known that Signum’s payment of a few invoices beyond the maximum payment terms was relevant to the insurer’s decision as to whether to accept the risk
- Even if the duty of disclosure had been breached, the insurer did not persuade the Court that it would have declined the insurance had it been informed of Signum’s payment history.
Automatic stoppage of cover
The Court found that the automatic stoppage term did not apply because:
- The object of the term was to prevent an insured who had the benefit of the credit risk insurance from continuing to supply a buyer, at the insurer’s risk, while at the same time abandoning normal prudential practices such as refusing to supply the buyer until trading terms were normalised
- The fact that a proposed insured has allowed a debt from a buyer to remain long outstanding, before inception of the policy was not considered a manifestation of that mischief
- The meaning of ‘receivable’ in the policy was confined to a debt which arose after the commencement of the policy.
This decision reinforces the view that the absence of formalities such as the formal issuing of a policy and payment of a premium are not fatal to the formation of a contract of insurance. Rather, a Court will consider the intentions of the parties by reference to the content and effect of their communications as a whole.
Authored by Danielle Sirio, Senior Associate, Melbourne.
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