Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd & Anor [2011] 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 paid.
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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