In this case, Justice McDougall of the New South Wales Supreme
Court considered whether, pursuant to s 28(3) of the Insurance
Contracts Act 1984 (Cth), Atradius Credit Insurance
NV (Atradius) was entitled to reduce its liability
under the policy to nil, on the basis of non-fraudulent
His Honour held that on the balance of probabilities, had
Atradius been given truthful and complete answers in response to
its insurance proposal, it would not have issued the policy and was
entitled to reduce its liability to nil.
Atradius issued a trade credit insurance policy in favour of
Prepaid Services Pty Limited, Optus Mobile Pty Limited and Virgin
Mobile (Australia) Pty Limited (the Insured). The
policy insured against the insolvency of one of the Insured's
major debtors, a company known as Bill Express Limited
(BXP), and against BXP's failure to pay
amounts owing to any of the Insureds. BXP became insolvent and the
Insured made a claim under the policy. Atradius argued that, had
proper disclosures been made, it would not have issued the policy
at all. His Honour noted that it was not submitted that a policy
would or might have been issued, but on different
In 2012, Justice McDougall found24 that Atradius was
entitled to avoid the policy by reason of fraudulent
misrepresentations pursuant to s 28(2) of the Insurance
Contracts Act 1984 (Cth) and that if the representations were
not fraudulent, Atradius was entitled to reduce its liability to
nil under s 28(3).
However the NSW Court of Appeal25 did not agree and
found that the conclusion that there had been a fraudulent
misrepresentation must be set aside and remitted the question of
whether Atradius was entitled to reduce its liability to nil back
to His Honour.
The Application of s 28(3)
Section 28(3) of the Insurance Contracts Act (Cth)
operates if an insurer is not entitled to avoid a contract of
insurance by reason of a failure to disclose, or a
misrepresentation, by the insured. It provides that 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 made26.
"This provision requires an inquiry as to the position
the insurer would have been in if the relevant misrepresentation
had not been made.....Accordingly, it must establish on the balance
of probabilities what it says its position would have been if the
misrepresentation had not occurred. That is so notwithstanding that
the hypothesis upon which the reduction of liability is based is
not an historical fact27"
Justice McDougall was required to consider hypothetical
inquiries that would have been made by Atradius had they been
provided with full disclosure as to BXP's financials and the
response the Insured would have provided and how Atradius would
have dealt with this further information. His Honour noted that the
information obtained from these further inquiries would have
persuaded Atradius that "BXP was a buyer that Atradius did
not want to insure".
Justice McDougall found in favour of Atradius and accepted that
had complete answers been provided in the proposal form, Atradius
would not have issued the policy and noted that s 28(3) did not
impose an obligation on the insurer to make continued inquiries of
the insured in order to discharge its burden of proof.
This decision highlights the importance of making complete and
accurate disclosures and representations when entering into a
policy of insurance and the difficulties faced in establishing that
a misrepresentation would not have altered an insurer's
decision to issue a policy.
It also demonstrates to insurers seeking to rely on this
provision the likely considerations of a court in relation to
underwriting practices and procedures and in the event that certain
non-disclosed material is provided to the insurer what, if any,
further inquiries would have been made and responses to such
inquiries when determining whether the policy would have been
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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