Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 (2 May 1989)

HIGH COURT OF AUSTRALIA

ADVANCE (N.S.W.) INSURANCE AGENCIES PTY. LIMITED AND ANOTHER v. MATTHEWS AND
ANOTHER [1989] HCA 22; (1989) 166 CLR 606
F.C. 89/021

Insurance

High Court of Australia
Mason C.J.(1), Deane(2), Dawson(1), Toohey(1) and Gaudron(1) JJ.

CATCHWORDS

Insurance - Proposal - Disclosure - Duty - Co-insured - Relevant facts known to one but not other - Non-disclosure by party with knowledge - Whether non-disclosure by "insured" - Fraud of one - Whether fraud of "insured" - Insurance Contracts Act 1984 (Cth), ss. 21, 28.

HEARING

1989, February 28; May 2. 2:5:1989
APPEAL from the Supreme Court of New South Wales.

DECISION

MASON C.J., DAWSON, TOOHEY AND GAUDRON JJ. The issue in this appeal concerns the true construction of the Insurance Contracts Act 1984 (Cth) ("the Act"), ss.21 and 28. The circumstances in which the appeal comes before the Court may be stated briefly. The second appellant, Home Owners Insurances Pty. Limited, is an insurer. The first appellant acted as its agent and in that capacity issued to the respondents, Mr and Mrs Matthews, an insurance policy in respect of the contents of premises at 1 William Street, South Strathfield. The second appellant claims to be entitled to avoid the policy on the ground that Mr Matthews fraudulently failed to disclose a material fact, namely the rejection by another insurer of a prior claim on an insurance policy in respect of a fire occurring on business premises in 1980.

2. In July 1986 the respondents were living in the premises already mentioned when a burglary took place, the respondents at that time having no insurance covering the contents of the premises. As a result of their loss on that occasion they decided to take out insurance. On 1 August 1986 Mr Matthews obtained from Advance Bank Australia Limited, the parent company of each of the appellants, a copy of the second appellant's proposal form for household insurance. Mr Matthews partly completed the form at the bank's premises in Bankstown. Later he and his wife filled in the answers to questions in the proposal. Two of the questions were:
" Q4. Have you ever had any:-
...
(e) claim rejected?
Q5. Are there any other facts relating to the
risks to be insured or the persons making
this application which should be
disclosed to enable a true assessment of
the application to be made before
acceptance?"
accepted the proposal and the stipulated premium and on 6 August 1986 issued a policy of insurance covering the contents of the premises, the sum insured being $30,000.

3. Two days later the respondents left the premises to travel to Melbourne via the snow country. Mrs Matthews returned on 14 August to find goods had been taken from the premises and that a fire had been started. The loss assessor was unable to detect any sign of a forced entry. On 22 August 1986 the respondents submitted a claim in excess of $25,000 for the goods stolen and the goods damaged in the fire. In October 1986 the claim was rejected on the basis of non-disclosure and misrepresentations relating to Questions 4, 5 and 6 in the proposal. Question 6 is no longer material in the light of the arguments addressed to this Court.

4. Following the rejection of the claim, Mr Matthews, wearing a sandwich board, took up a position outside the offices of the Advance Bank and the first appellant and began to hand out leaflets. The sandwich board and the leaflets contained statements reflecting adversely on the first appellant as a provider of insurance. The first appellant commenced proceedings for an injunction restraining Mr Matthews from distributing such leaflets and from continuing to advertise such material by means of a sandwich board or otherwise. The first appellant also sought declarations that it was not liable to indemnify the respondents under the policy and that, in the events that had happened, it was entitled to avoid the policy and had effectively done so. The second appellant was added as an additional plaintiff and Mrs Matthews was added as a second defendant. However, she disappeared before the hearing and has taken no part in the proceedings.

5. At first instance, Young J. rejected the appellants' case to the extent to which it was based on an alleged fraudulent misrepresentation arising from the respondents' answer to Question 6. The learned judge found that there had been no misrepresentation in respect of the answer to Question 4 but that the respondents were in breach of a statutory duty, arising under s.21 of the Act and "virtually co-extensive" with the subject-matter of Question 5, to disclose the existence of the earlier insurance claim and its rejection. He held that the non-disclosure was fraudulent on the part of Mr Matthews, though not on the part of Mrs Matthews, and that, on the true construction of s.28 of the Act, this finding did not have the effect of reducing the appellants' liability under the policy. His Honour continued an injunction against placarding which he had granted earlier.

6. It is necessary to state the facts as found by Young J. and to recount in rather more detail his Honour's reasoning. Young J. found that Mr Matthews was a partner in a business at Blacktown which suffered a fire in 1980. A claim was made on another insurance company for loss arising from the fire. That company rejected the claim. Litigation ensued. The case was settled, Mr Matthews receiving one-half of the proceeds of the settlement. In evidence in the present case Mr Matthews asserted that, although he was ostensibly a partner in the business, he had sold his business to a Mr Davidson before the fire and that he was merely the manager of the business. Young J. rejected this claim, holding that Mr Matthews was a partner in the business at the relevant time. However, his Honour concluded that Question 4, on its true construction, referred only to the rejection of a claim made jointly by Mr and Mrs Matthews.

7. On this point his Honour said:

"The insurance in the instant case was a joint
insurance in the true sense. It was a contract
made jointly in respect of jointly owned chattels.
The flavour of all the authorities ... is that
where one has such a joint policy the word "you"
should be taken to mean the jointure composed of
all the components. Accordingly, in my view on the
true construction of the question it only covers
the situation where the husband and wife have had a
claim rejected."

Therefore, the answer to Question 4 did not amount to a misrepresentation.

8. Nevertheless Young J. found that the failure to disclose the rejection of the earlier insurance claim amounted to a breach of the respondents' duty to disclose "every matter that is known to the insured, being a matter that - (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk ... or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant" within the meaning of s.21(1) of the Act. In coming to this conclusion Young J. rejected a claim by Mr Matthews that the matter of the fire in 1980 never entered his head when he was answering the questions in the proposal. There being no evidence that Mrs Matthews knew of the 1980 fire, his Honour concluded that, though the case did not fall within s.21(1)(a), it fell within s.21(1)(b).

9. The question then was whether the non-disclosure was fraudulent within the meaning of s.28(2), in which event the insurer was entitled to avoid the contract. Young J. found that the non-disclosure was fraudulent on the part of Mr Matthews, but not on the part of his wife. His Honour was of the view that s.28(2) contemplated a fraudulent failure to disclose on the part of the persons who jointly became the insured. Accordingly, the case did not fall within s.28(2).

10. The final question was whether, in the light of the non-disclosure, "the liability of the insurer in respect of (the) claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred": see s.28(3). Young J. held, first, that the expression "reduced to the amount" meant "diminished" not "abolished". His Honour went on to find that the evidence indicated that there was insufficient adherence to the insurer's guidelines with respect to acceptance or rejection of proposals to conclude that the policy would not have been written if full disclosure had been made; and, further, that there was insufficient evidence to sustain a conclusion that the insurer would have made it a condition of the policy that a burglar alarm which worked efficiently be installed.

11. His Honour found that there should be no declaration of no liability as sought by the appellants and stood the proceedings over so that the court could determine the quantum of the claim either by agreement or by reference to the Master.

12. On appeal the Court of Appeal by majority (Hope and McHugh JJ.A.; Samuels J.A. dissenting) dismissed the appellants' appeal with costs. McHugh J.A. (with whom Hope J.A. agreed) considered that the policy was a composite policy whereby Mr and Mrs Matthews insured their joint and several interests and that in consequence each was an "insured" for the purpose of s.21. However, his Honour concluded that within the context of s.28 the knowledge of all the insured is required before there is a duty to disclose and that, in the case of joint insurance of an interest, "the insured" must mean both of the joint insured. And it followed that because "the insured" had not failed to complete that duty to disclose, s.28(3) had no application.

13. The appellants' primary case in this Court is that, on the true construction of s.28, an insurer can rely on a breach of the duty to disclose even though the failure to disclose is fraudulent on the part of one insured person but not on the part of the other insured who is unaware of the true facts.

14. Before examining the particular submissions made by the appellants in support of their case, it is convenient to refer to the long title and substance of the Act and to set out some of its provisions, including ss.21 and 28. The long title of the Act is in these terms:

"An Act to reform and modernise the law relating to
certain contracts of insurance so that a fair
balance is struck between the interests of
insurers, insureds and other members of the public
and so that the provisions included in such
contracts, and the practices of insurers in
relation to such contracts, operate fairly, and for
related purposes".

15. Subject to certain exceptions provided for in s.9 which are not material to this case, the application of the Act extends to contracts and proposed contracts of insurance the proper law of which is or would be the law of New South Wales (s.8(1)). Part II deals with the duty of utmost good faith. The Part does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure (s.12). Section 13 provides that a contract of insurance is a contract based on the utmost good faith and in which there is implied a provision requiring each party to act towards the other with the utmost good faith. A contract of insurance is not capable of being made the subject of relief under any other Act, whether of the Commonwealth, the State or a Territory, that provides for relief in respect of harsh, oppressive, unconscionable, unjust, unfair or inequitable contracts (s.15(1)). Part III, which deals with insurable interests, is not relevant for present purposes.

16. Part IV deals with disclosure and misrepresentations. Division 1, which deals with the duty of disclosure, comprises ss.21 and 22. Division 2, which deals with misrepresentations, comprises ss.23 to 27. Division 3 deals with remedies for non-disclosure and misrepresentation, and comprises the remaining sections in Pt IV, ss.28 to 33.

17. Section 21, which governs the duty of disclosure, provides:

"(1) Subject to this Act, an insured has a
duty to disclose to the insurer, before the
relevant contract of insurance is entered into,
every matter that is known to the insured, being a
matter that -
(a) the insured knows to be a matter relevant
to the decision of the insurer whether to
accept the risk and, if so, on what
terms; or
(b) a reasonable person in the circumstances
could be expected to know to be a matter
so relevant.
(2) The duty of disclosure does not require
the disclosure of a matter -
(a) that diminishes the risk;
(b) that is of common knowledge;
(c) that the insurer knows or in the ordinary
course of his business as an insurer
ought to know; or
(d) as to which compliance with the duty of
disclosure is waived by the insurer.
(3) Where a person -
(a) failed to answer; or
(b) gave an obviously incomplete or
irrelevant answer to,
a question included in a proposal form about a
matter, the insurer shall be deemed to have waived
compliance with the duty of disclosure in relation
to the matter."

18. Section 24 is important because it has the effect of converting into representations what would otherwise be warranties on the part of the insured with respect to the existence of a state of affairs. The section provides:

"A statement made in or in connection with a
contract of insurance, being a statement made by or
attributable to the insured, with respect to the
existence of a state of affairs does not have
effect as a warranty but has effect as though it
were a statement made to the insurer by the insured
during the negotiations for the contract but before
it was entered into."

19. Section 28, which governs the remedies for non-disclosure and misrepresentation, provides:

"(1) This section applies where the person who
became the insured under a contract of general
insurance upon the contract being entered into -
(a) failed to comply with the duty of
disclosure; or
(b) made a misrepresentation to the insurer
before the contract was entered into,
but does not apply where the insurer would have
entered into the contract, for the same premium and
on the same terms and conditions, even if the
insured had not failed to comply with the duty of
disclosure or had not made the misrepresentation
before the contract was entered into.
(2) If the failure was fraudulent or the
misrepresentation was made fraudulently, the
insurer may avoid the contract.
(3) If the insurer is not entitled to avoid
the contract or, being entitled to avoid the
contract (whether under sub-section (2) or
otherwise) has not done so, the liability of the
insurer in respect of a claim is reduced to the
amount that would place him in a position in which
he would have been if the failure had not occurred
or the misrepresentation had not been made."

20. Section 31(1) enables the court in respect of a contract of insurance that has been avoided on the ground of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation, if it would be harsh and unfair not to do so, to disregard the avoidance and, if it does so, to allow the insured to recover the whole, or such part as the court thinks just and equitable in the circumstances, of the amount that would have been payable if the contract had not been avoided. The power conferred by the sub-section is only exercisable where the court is of opinion that, in respect of the loss that is the subject of the proceedings before the court, the insurer has not been prejudiced by the failure or misrepresentation or, if the insurer has been so prejudiced, the prejudice is minimal or insignificant (s.31(2)).

21. Section 33 provides:

"The provisions of this Division are exclusive
of any right that the insurer has otherwise than
under this Act in respect of a failure by the
insured to disclose a matter to the insurer before
the contract was entered into and in respect of a
misrepresentation or incorrect statement."

22. The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt IV. To that extent Pt IV is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited: see Gamer's Motor Centre (Newcastle) Pty. Ltd. v. Natwest Wholesale Australia Pty. Ltd. [1987] HCA 30; (1987) 163 CLR 236, at pp 243-244. However, in the light of our view as to the meaning of the relevant provisions of the statute, we do not find it necessary to resort to the common law or to explore the bases on which it may be permissible to engage in that exercise.

23. Section 33 does not exclude the giving of a warranty by the insured in the contract that the answers given by each insured in the proposal form are correct and correct to the knowledge of each insured. But s.24 appears to block any resort by the insurer to that avenue of recourse against persons who are co-insured in respect of pre-contractual statements which are incorrect and fraudulent on the part of one co-insured but not on the part of the other. This is a matter to be taken into account in considering ss.21 and 28. Another matter to be taken into account is the power conferred upon a court by s.31 of the Act to disregard avoidance in certain circumstances.

24. The Act does not specifically address the problems which arise when the contract of insurance is between an insurer and more than one insured. Consequently, the task which confronts this Court is that of ascertaining how ss.21 and 28 apply to such a case.

25. The appellants' basic submission is that the references to "the insured" and "the person who became the insured" in s.28(1) are to each co-insured and to each person who became the insured, in the case where the contract is with more than one insured person. The submission assumes, in accordance with the judgments in the Court of Appeal, that the duty to disclose imposed by s.21(1) extends to each of the insured. It is natural to read the reference in that sub-section to "an insured" as a reference to each and every insured when the context is one in which the statute sets out to impose a duty to disclose material facts to an insurer. As Samuels J.A. noted in the Court of Appeal, the insurer has an interest in the individual history and claims record of each person who seeks insurance with the insurer. It would not harmonize with this context or with the existence of the duty of utmost good faith imposed by ss.13 and 14 to read s.21 as creating only a joint duty to disclose, that is, a duty to disclose limited to the joint acts and omissions of the co-insured.

26. For similar reasons we would be disposed to read Questions 4 and 5 as directed to each of the insured. The reference in Question 5 to "facts relating to ... the persons making this application" obviously relates to each of the persons making the application. True it is that the appellants' proposal form is not set out in such a way as to make provision for the giving of individual answers by each co-insured. However, it is unnecessary to pursue this aspect of the case because it is common ground in this Court that, if there was a duty to disclose the rejection of the earlier claim to which Mr Matthews was a party, there was a relevant non-disclosure. So nothing now turns on the precise meaning of Questions 4 and 5.

27. Young J. found, and it is not now contested, that the non-disclosure was of a matter that "a reasonable person in the circumstances could be expected to know to be a matter so relevant" (see s.21(1)(b)), that is, relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. The critical question then is whether the failure to disclose was "fraudulent" within the meaning of s.28(2).

28. It is convenient to begin the discussion of this question by saying that, if we are to read "an insured" in s.21(1) as a reference to each co-insured, it is natural to read the references in s.28(1) to "the person who became the insured" and "the insured" in the same way. The first respondent resists this construction, submitting that "the person who became the insured" is an expression that naturally refers to those persons collectively so that the right to avoid the contract, conferred by s.28(2), arises only when there is a failure by those persons to comply with the duty of disclosure and their failure was fraudulent. The answer to this submission is that, if s.21 imposes a duty on each person who becomes insured to disclose a material matter to the insurer, as in our opinion it does, then it is logical to read s.28(1) as referring to such a failure, that is, the failure of one co-insured to disclose, even though the other co-insured is not guilty of such a failure. And it follows also that the reference in s.28(2) to a failure that "was fraudulent" is a reference to a fraudulent failure to disclose on the part of a co-insured.

29. The first respondent submits that this interpretation, if adopted, would result in injustice to an innocent co-insured such as Mrs Matthews. If the insurer exercised its right to avoid the contract on account of a fraudulent failure to disclose by the other co-insured, the innocent co-insured would be deprived of the benefit of his or her insurance. According to the first respondent, s.31(1) provides a less than adequate remedy in this situation because s.31(2) conditions an exercise of the power conferred by s.31(1) on a finding that the insurer has not been prejudiced by the failure or has been prejudiced only to a minimal or insignificant extent. Granted that this is so, it is not a matter that compels one to adopt a different construction. Although Young J. found that there was insufficient evidence upon which to conclude that the insurer in the present case would not have entered into the contract of insurance had the fraudulent failure to disclose not occurred, there is nothing inherently unjust in providing as a matter of general principle that an insurer is entitled to avoid a contract of insurance which it would not have entered into but for a fraudulent failure to disclose a material matter. Moreover, it would be inherently unjust for the person responsible for that fraudulent non-disclosure to be able to compel performance of the contract by the insurer. Accordingly, the interpretation which we favour is not so unjust or inconvenient as to require the Court to place a meaning on s.28 different from that which its language naturally bears.

30. The first respondent also contended that any suggested injustice suffered by the insurer on this interpretation was due not to the statutory provisions but to the terms of the insurance policy itself. It was said that a question could have been asked in terms similar to that formulated by Windeyer J. in Davis v. National Insurance Office (1889) 10 NSWR(L) 90. His Honour was there concerned with a negative answer to a question relating to the proponent's past claims in circumstances where the proponent was a partnership which had never been a claimant although one of its members had been. In holding that the question had been correctly answered, Windeyer J. said (at p 105):

"(E)very one of the partners is not bound to answer
the question for himself, though this may lead to
the dangerous result that two persons who have been
convicted of arson, committed for the purpose of
fraud upon an insurance company, may by afterwards
taking an innocent person into partnership with
them, evade the object of the question by truly
answering, as in this case, that they (that is, the
firm) have not been applicants before. To defeat
such a method of fraud the insurance company might
frame their question thus: 'Have the applicants,
either collectively or individually, and if
individually either alone or in conjunction with
other persons, ever made a claim upon an insurance
company ...?'"

The first respondent contended that such a question as that proposed would have placed Mrs Matthews on notice to inquire of her husband as to any prior claims he may have made. But even if this were so, the insurer would have advanced only a small distance because an insured is not required to disclose any matter unless it is "known to the insured". In any event, on the respondents' view of s.28, the insurer would only be able to defeat the fraudulent plan described by Windeyer J. if all the applicants were in fact fraudulent. In those circumstances, the framing of the questions in the policy can be of little relevance to the insurer's ability to avoid the contract.

31. The judgments in the courts below devote much attention to the question whether the contract of insurance in the present case was a joint insurance or a composite insurance whereby, under the one contract, the co-insured insured their separate and individual interests as well as property jointly owned by them. In this Court the parties have taken up positions opposite to those taken in the courts below. Here the appellants submit that a contract of insurance whereby husband and wife insure their property is, in the absence of some expression of intention to the contrary, a joint insurance. This, so it is said, is because married persons seek a joint insurance of their household property, notwithstanding that it may be owned jointly as to part and separately as to part. On the other hand, the first respondent submits that, in accordance with the traditionally held view, the insurance of the parties' jointly owned property was joint insurance and the insurance of their separate property was composite. It is unnecessary to resolve this question in order to dispose of this appeal. But we should point out that, even in the case of a composite contract, some obligations are joint so that it is impossible to treat the contract of insurance as involving separate contracts: see Deaves v. C.M.L. Fire and General Insurance Co. Ltd. (1979) 143 CLR 24, at p 41; Federation Insurance Ltd. v. Wasson [1987] HCA 34; (1987) 163 CLR 303, at pp 311, 314-315, 318-319; United Shoe Machinery Company of Canada v. Brunet (1909) AC 330, at p 340.

32. In the result the appellants succeed on their primary argument so that we have no occasion to consider the alternative argument that the liability is reduced to nil under s.28(3). However, there remains outstanding the possibility that the respondents or one of them may request the court to exercise the power conferred by s.31. Without expressing any view as to the position of the respondents in this regard but in view of this possibility this Court should not proceed to the making of declarations and consequential orders; instead the Court should remit the matter to Young J. for the making of orders consistent with the judgment of this Court.

33. In the result the appeal should be allowed and the order of the Court of Appeal dismissing the appeal should be set aside; in lieu thereof the appeal to that Court should be allowed, the orders (other than orders 1 and 4) and the declarations made by Young J. should be set aside and the matter should be remitted to the Supreme Court of New South Wales for the making of orders consistent with the judgment of this Court. In accordance with the conditions imposed on the grant of special leave to appeal the appellants shall pay the costs of the appeal to this Court and the orders for costs made in the courts below shall not be disturbed.

DEANE J. The facts and relevant statutory provisions are set out in the joint judgment of the Chief Justice, Dawson, Toohey and Gaudron JJ. I agree with their Honours' overall conclusion about the outcome of the appeal. The reasons which have led me to that overall conclusion diverge, however, from those advanced by their Honours. It is therefore necessary that I briefly state my own reasons for it.

2. The policy of insurance between the appellant insurer and the respondents, Mr. and Mrs. Matthews, was a joint one. True it is that it extended to both jointly-owned and separately-owned property. However, it applied indifferently to both classes of property and treated the separately-owned property as if it were jointly-owned. The insurer was not concerned with questions of ownership as between Mr. and Mrs. Matthews. Its obligation was to them jointly only. The question whether, in the absence of Mrs. Matthews, the insurer was entitled to make payment to Mr. Matthews alone does not arise on the appeal. Obviously, as between Mr. and Mrs. Matthews, their respective rights to the proceeds of any payment by the insurer would depend, in the absence of express or implied agreement to the contrary, on their individual rights of ownership to the destroyed or damaged property.

3. I do not agree with the view that the references to "an insured" and "the insured" in s.21(1) of the Insurance Contracts Act 1984 (Cth) ("the Act") should be read as distinct references to each of a number of joint insured with the consequence that the duty of disclosure of joint insured effectively becomes a number of separate duties rather than a joint one. It appears to me that, in the context of a statutory provision defining the duty of disclosure of an insured and of the ordinary presumption that the statutory singular includes the plural, those references to "an insured" and "the insured" must, in the case of a joint policy of insurance, be read as collective references to the persons who constitute the insured under the policy. That being so, Mr. and Mrs. Matthews had a joint obligation to disclose to the insurer:

"every matter that is known to the insured, being a
matter that -
(a) the insured knows to be a matter relevant
to the decision of the insurer whether to
accept the risk and, if so, on what
terms; or
(b) a reasonable person in the circumstances
could be expected to know to be a matter
so relevant." (emphasis added)

It would seem clear that "a reasonable person in the circumstances could be expected to know" that Mr. and Mrs. Matthews' earlier claim was a "matter so relevant". The question arises whether that earlier claim can properly be said to have been "known to the insured" in circumstances where it was known to Mr. Matthews but has not been shown to have been known to Mrs. Matthews. That question is one of construction of the provisions of s.21(1). Put differently, it is whether, in the case of joint insured, a matter is known to "the insured" for the purposes of that sub-section when it is known to one, but not all, of them.

4. The answer to that question of construction is essentially a matter of impression. There are considerations which militate in either direction. On the one hand, there is something to be said for the view that an innocent party to a joint policy of insurance should not be prejudiced by matters relating to his or her co-insured of which he or she is quite ignorant. On the other hand, it is difficult to see why there should be no duty binding the joint insured to procure disclosure of a relevant matter which is within the knowledge of one of their number. On balance, it appears to me that the preferable construction of s.21(1) is to treat the words "known to the insured" as meaning, in the case of a policy of joint insurance, within the collective knowledge of the joint insured, that is to say, as known to at least one of them.

5. Once that construction of s.21(1) is accepted, it follows that Mr. Matthews' earlier claim was "known" to "the insured". It also follows that the positive and negative requirements of s.28(1) of the Act were also satisfied: Mr. and Mrs. Matthews, being "the person who became the insured", failed to comply with the duty of disclosure imposed by s.21(1); the case is not one in which it appears that "the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure".

6. The final question is whether s.28(2) of the Act was applicable in the circumstances to enable the insurer to avoid the contract. The answer to that question depends upon whether "the failure" (i.e. "to comply with the duty of disclosure") was "fraudulent" in circumstances where it was fraudulent on the part of one joint insured (i.e. Mr. Matthews) but not fraudulent on the part of the other (i.e. Mrs. Matthews). Conformably with what I have accepted as the proper construction of s.21(1), that failure was a joint failure to discharge a joint duty. Where non-disclosure on the part of one joint insured with knowledge of the relevant material has been fraudulent, the fraud of that joint insured has been operative to prevent discharge of that joint duty. Such fraud on the part of one of the joint insured is sufficient to characterize the joint failure to disclose as fraudulent. Accordingly, Mr. and Mrs. Matthews' failure to comply with the duty of disclosure was "fraudulent" for the purposes of s.28(2). That being so, the insurer was entitled to avoid the policy.

7. It is strictly unnecessary that I consider the question whether, if the insurer had not been entitled to avoid the policy, the provisions of s.28(3) would, if the necessary foundation had been laid in evidence, have entitled the insurer to reduce its liability to Mr. and Mrs. Matthews. That question has, however, been fully argued and I consider it appropriate that I indicate my views in relation to it. I would reject the submission made on behalf of the insurer that it would, in the postulated circumstances, have been entitled to negate all liability on the ground that, if it had known of the previous claims history, it would not have issued a policy at all. Section 28(3) does not offer an indirect means of avoiding a policy. Its starting point is the existence of the policy and the insurer's entrenched liability under it. Its operation, in a case to which it applies, is to reduce the amount of that liability. That being so, any reduction in the amount of the insurer's liability would, in the postulated circumstances, have fallen to be calculated on the basis of the position which would have existed if the insurer had issued a policy after full disclosure of the claims history. That is to say, the insurer's liability under the policy would be reduced by any additional amount or amounts of premium it would have charged if there had been full disclosure. If the evidence established that, in such circumstances, the additional amount of premium which would have been charged would have exceeded the amount of the claim, the amount of the insurer's liability would be reduced to nil. In that regard, I respectfully dissent from the view of the learned trial judge that s.28(3) can never operate so as to reduce the amount of the insurer's liability to a nil amount in the circumstances of a particular case.

8. I agree with the orders proposed by the Chief Justice, Dawson, Toohey and Gaudron JJ.

ORDER

Allow the appeal.

Set aside the order of the Court of Appeal other than the order for costs and in lieu thereof order that the appeal to that Court be allowed.

Set aside the orders (other than orders 1 and 4) and the declarations of Young J.

Remit the matter to the Supreme Court of New South Wales for the making of orders consistent with the judgment of this Court.

Order that the appellants pay the costs of the respondents in this Court.