J&J Richards Super Fund Pty Limited ATF The J&J Richards Superannuation Fund v Nielsen

J&J Richards Super Fund Pty Limited (JJ) was the trustee for the J&J Richards Superannuation Fund. It commenced a representative proceeding against two companies, Linchpin Capital Group Limited (In Liq) (Linchpin) and Endeavour Securities (Australia) Limited (In Liq) (Endeavour), and their directors, for alleged statutory breaches of the Corporations Act (equivalent to the NZ Companies Act) and the Australian Securities and Investment Commission Act.

The claims concerned investments which JJ made in two managed investment schemes promoted by Linchpin and Endeavour in information memoranda (IM) and product disclosure statements (PDS). JJ said the loans were also made contrary to representations in the IM and PDS which were misleading and deceptive. Damages were sought.

AIG issued a D&O policy to Linchpin’s directors. After the proceedings were issued, the Court granted JJ leave to join AIG under the Civil Liability (Third Party Claims against Insurers) Act (NSW).

The judgment primarily concerned the claim against AIG with respect to its liability to indemnify Linchpin’s directors under the D&O policy.

AIG resisted JJ’s claim on several grounds. This article focusses on AIG’s defence that Linchpin breached its duty of disclosure under s 21 Insurance Contracts Act 1984 (ICA) and Linchpin’s response that AIG waived the duty of disclosure.

One of the four respondent directors, Mr Nielsen, completed the proposal form for Linchpin.

AIG contended that Linchpin (as the party who was insured and owed duties of good faith) breached its duty of disclosure under s 21 ICA because, at the time the proposal form was submitted to AIG and up to the time that AIG accepted the risk, Mr Nielsen had actual knowledge of the matters relied on by JJ in the proceeding. It either knew these were relevant to AIG’s decision to accept the risk and/or a reasonable person in the circumstances would be expected to know the matters were relevant.

AIG had the onus of establishing each of the elements of its non-disclosure defence. Those were whether:

1. Linchpin had actual or constructive knowledge of matters relevant to AIG’s decision to accept the risk and, if so, on what terms.
2. Compliance with the duty of disclosure had been waived, pursuant to s 21(2)(d) ICA.
3. The duty of disclosure had been waived because Linchpin gave an obviously incomplete answer in the proposal form to a question about a matter pursuant to s 21(3) ICA.
4. AIG was entitled to reduce its liability to nil pursuant to s 28(3) ICA.

The duty of disclosure in s 21(1) ICA had two elements. First, the matter alleged not to have been disclosed must be known by the insured. In the case of a corporation that includes knowledge attributed (by the usual rules of attribution) to its relevant officers. Second, the insured must have actual knowledge of information which a reasonable person in their position could be expected to know was relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

AIG’s non-disclosure defence was based on the same factual allegations that JJ made against the directors in the proceedings and certain other facts that were not in dispute. These included that related party loans were made, and the loans were not adequately secured.

The proposal form included the following question at 1.18:

After enquiry, is the Applicant or any of its Directors of [sic] officers aware of any facts or circumstances which might afford valid grounds for any future investigations, enquiries, regulatory proceedings or other claims, which may be covered by us, under any of the coverage of which it has applied?

Mr Nielsen answered “Yes” to this question.

The Judge was satisfied that on reading question 1.18, Mr Nielsen knew that Linchpin’s conduct, including the matters not disclosed, was a matter relevant to AIG’s decision whether to accept the risk. Linchpin therefore had the requisite actual knowledge required under s 21(1)(a) ICA.

The Judge was satisfied that both limbs of s 21(1) were engaged. The knowledge of the directors, in particular that of Mr Nielsen, was sufficient to establish that Linchpin knew the matters not disclosed were relevant to AIG’s decision to accept the risk. Further, that a reasonable person in the same circumstances could be expected to know that they were relevant.

AIG’s underwriter who issued the D&O policy gave evidence about AIG’s underwriting guidelines, her receipt and review of the proposal form, subsequent enquiries and communications with Linchpin’s broker in relation to Linchpin’s proposal. She also addressed what she would have done had she been informed of the matters that AIG alleged Linchpin failed to disclose.

On receipt and review of the proposal form, she completed a standard AIG form document described as a referral commentary on which she made the following notes:

No claims per the prop, however, the insured is aware of circumstances that could be grounds for further investigation..

Per the prop, these appear to be complaints and enquiries as a national [sic] course of business related to their AFSL, presumably, they are PI type of claim.

The perceived requirement for more information was further confirmed by the inclusion of a requirement in the referral commentary that the issue of the policy be subject to a signed and dated AIG proposal being received prior to binding.

However, Linchpin did not complete or provide the AIG proposal form. No further questions were asked. AIG proceeded to bind cover for the D&O insurance.

The underwriter’s evidence, by reference to AIG’s underwriting guidelines, was that if there was disclosure of the information at prior to accepting the risk, it would have raised real concerns about corporate governance with the directors managing the company with a cavalier attitude. On that basis, she would not have offered cover. The Judge accepted that evidence.

The Judge then turned to whether the duty of disclosure had been waived. This largely turned on the questions asked, and the answers provided, in the proposal form, and the extent of subsequent requests made by AIG for additional information from Linchpin.

The Judge found the underwriter had a very limited recollection of the circumstances in which she agreed that AIG would extend D&O insurance to Linchpin. She had no actual recollection of reviewing Linchpin’s answers in the proposal form or the steps that she took as a result. She largely referenced her usual practice. The Judge said that it was apparent from her cross-examination that she had significantly departed from her usual practice when considering a proposal form, subsequent communications with Linchpin’s broker, and the decision to offer cover.

The proposal form Mr Nielsen completed was used for obtaining quotations from another insurer, DUAL. This was the proposal form provided to AIG. AIG’s underwriter gave evidence that to the extent that any alternative proposal form did not seek the same information that would be sought in an AIG form, her usual practice would be to direct specific questions to the prospective insured, rather than requiring them to answer AIG’s usual questions.

The DUAL proposal form contained a series of questions about claims and circumstances, each of which was followed by text requiring a Yes or No answer. One of the questions said that if the applicant answered Yes, to provide details of any losses sustained during the last five years and whether any insurance monies were paid as a result. However, unlike the AIG proposal form, the DUAL proposal form did not specifically ask for further particulars where affirmative answers were given.

Critically, question 1.18 only sought an affirmative or negative answer to knowledge of any facts or circumstances that might give rise to any future investigation, enquiries, regulatory proceedings or other claims. In contrast, the AIG proposal form required the provision of further details if that question was answered “Yes”.

The duty of disclosure in s 21 ICA is subject to the qualifications in ss 21(2) and (3). These relevantly include a waiver by an insurer of the duty of disclosure pursuant to s 21(2)(d), or a waiver pursuant to s 21(3) if the insured failed to answer or gave an obviously incomplete or irrelevant answer to a question in a proposal form.

The judgment contains an extensive review of Australian and New Zealand decisions on waiver of the duty of disclosure.¹ The Judge observed that it was often difficult to draw a line between non-disclosure and sufficient disclosure to enable an insured to rely on waiver. The Judge referred to the following principles:

1. An insurer cannot take advantage of its wilful blindness or negligence if it fails to have regard to information provided to it, provided “sufficient information” has been placed at its disposal.
2. The obligation of an insured to disclose every material fact to an insurer is satisfied if the insured “discloses sufficient to call attention of the underwriters in such a manner that they can see that if they require further information, they ought to ask for it”.
3. An insured cannot satisfy its duty of disclosure by only providing an insurer with “the means of knowledge”. Rather the principle is: “That less than the whole of the relevant information may amount to disclosure, provided that what is conveyed fairly indicates to the insurer that there is more information to be obtained if he chooses to ask for it, or to have it”.
4. The duty to disclose material information to the insurer is on the insured. It is only where an insurer is “Put on enquiry about some particular matter that it can be said that they have waived the obligation, the requirement, as to disclosure”.

The Judge said that the statements of principle in the authorities make clear that before an insurer can be held to have waived an insured’s obligations of disclosure, the insured must have fairly disclosed the existence of the risk and the insurer has communicated, expressly or by silence that further particulars of details of the risk are not required.

The Judge found that, while the matters not disclosed in Linchpin’s proposal form were clearly material to AIG’s decision to bind cover, the proposal form nonetheless presented a fair representation of the future risks that AIG could be exposed to. AIG had a responsibility to inquire further into these risks before binding the policy. The omission to do so constituted a waiver of AIG’s right to rely on Linchpin’s non-disclosure. Therefore, the D&O policy was held to respond to the claims brought by the directors.

Under the new NZ Contracts of Insurance Act 2024,² non-consumer insurance policyholders such as insureds applying for PI and D&O risks have a duty to make a “fair presentation of the risk”. The Act provides that a “fair presentation of the risk” is one:

1. That discloses every “material circumstance” that the policyholder knows or ought to know or, failing that, disclosure providing sufficient information to put a prudent insurer on notice that it needs to make further inquiries.
2. That makes the disclosure reasonably clear and accessible to a prudent insurer.
3. In which every “material representation” as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.

A circumstance or representation is “material” if it would influence the judgment of a prudent insurer in deciding whether to underwrite the risk and, if so, on what terms.

The J&J Richards case is a good demonstration of the tension that exists between an insured’s duty to disclose any facts within their knowledge which are material for the insurer to know on the one hand, and whether the insured has disclosed sufficient information and made a fair presentation of the risk on the other. If there has been a fair presentation of the risk such that if the insurer is on inquiry and fails to seek more information, the insurer runs the risk of a finding that they have waived disclosure of those facts by failing to make such inquiry.

1. These included the New Zealand Court of Appeal’s decision in Jaggar v QBE Insurance International Ltd [2007] 2 NZLR 336.
2. This has been passed by Parliament but the date the Act will come into force has not yet been determined.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.