Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd
& Anor  VSC 467
In what appears, at first, to be an alarming decision, the
Victorian Supreme Court recently found that an insured was entitled
to the benefit of an insurance policy despite the fact that no
policy had been prepared, no invoice issued and no premium
The insured supplied synthetic resins to customers on 60 day
payment terms. By the end of 2007, with the global financial crisis
looming, the insured had growing concerns about its exposure to
debts owed by its customers. To address these concerns, it
instructed its insurance broker to arrange insurance cover for
potential losses in the event that its customers failed to pay.
In the early part of 2008 the broker negotiated cover for the
insured's credit risk in respect of a number of customers one
of which was Signum. By the end of April 2008, the broker and
insurer had agreed all essential terms of the policy in respect of
the Signum risk. The insurer sent a document entitled
"Indication of Terms" to the insured. The document stated
that the terms were provided without commitment on the part of the
insurer "until the insurer provides written confirmation that
it is on risk and agrees to issue a policy". Neither written
confirmation nor a policy was sent by the insurer. Signum went into
liquidation in November 2008 owing the insured over $2 million. The
insured made a claim under a policy that it claimed had been
arranged in April.
The dispute found its way to the Victorian Supreme Court which
held that a contract of insurance had come into existence. The
Court found that both parties had intended to form a contract of
insurance on the terms agreed. It considered that the failure to
issue a policy document and the non-payment of the premium were
simply administrative oversights. It was relevant that all of the
terms of the insurance cover had been agreed, and that the employee
who negotiated the policy on behalf of the insurer himself believed
that the insurance had been arranged. He had left the company soon
after arranging the insurance and gave evidence that his failure to
issue an invoice and policy was an oversight.
The decision serves as a reminder to insurers that the substance
and effect of all communications with an insured will be important,
and that documents containing caveats, such as the "Indication
of Terms" in this case, will not prevent a contract of
insurance from forming where other communications are consistent
with an intention to form that contract.
One other point coming out of this case: The insurer had argued
that even if there was a contract of insurance in place, it was
entitled to rely on a standard automatic stoppage term in the
policy. This term provided that cover would not apply in respect of
any loss sustained in relation to goods despatched after a payment
by the buyer (on another purchase) became and remained overdue. The
insurer alleged that cover for the whole of Signum's debts was
suspended because a debt of $957 owed by Signum to the insured had
been outstanding since 2002. The court construed the automatic
stoppage provision narrowly. Although nothing in the literal
wording pointed to this conclusion, the Court held that the proper
interpretation of the provision was to confine the meaning of
"receivable" to a receivable that first arises after the
commencement of the policy. As the payment had been overdue for
years prior to the policy coming into existence, the Court held
that the automatic stoppage provision did not operate.
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Whereas most insurance policies exclude liability arising under contract, insurers can
positively benefit where an insured has limited or excluded its liability under contract.
This usually arises where the insured's contract has a limitation or exclusion of liability clause in the insured's favour.