Rathie v ING Life[2004] QSC 146

SUPREME COURT OF QUEENSLAND 

1. WILSON J: By a contract of insurance with effect from 1 July 1996, made between Minter Ellison (a firm of solicitors) as the insured and the defendant as the insurer, the defendant undertook to pay benefits to Minter Ellison should a member of that firm become totally disabled. The plaintiff was a member of the firm, who became totally disabled in August 1997. He seeks a declaration as to the amount of the benefit payable by the defendant in respect of his total disability.

2. Very broadly, there are three areas of contention:

1. what are the relevant terms and conditions of the contract of insurance (and where are they to be found);
2. their interpretation;
3. whether the benefit payable in respect of the plaintiff was altered by the issue of a new policy document with effect from 1 July 1998.

3. Minter Ellison previously held group salary continuance insurance (formerly called disability insurance) with another insurer, Australian Casualty & Life (“AC & L”). That policy was due for renewal on 1 July 1996. White & Lewis Consulting (and some associated companies), brokers acting on behalf of Minter Ellison, negotiated with the defendant for it to provide such insurance from 1 July 1996. The new policy document was not issued by the defendant until October 1996. However, it was common ground that the new contract of insurance took effect from 1 July 1996.

4. Before commencing to review the negotiations and the policy document itself, it may be helpful to sketch the broad parameters of the contract of insurance and the dispute between the parties. The contract of insurance was made between the defendant as insurer and Minter Ellison as the insured. Like the previous policy issued by AC & L, it was a group policy, and individuals were accepted as members of a plan at a defined level of benefit. In the event of a member becoming disabled, benefits were payable to Minter Ellison in respect of that member. The negotiations for the contract of insurance between the defendant and Minter Ellison included discussion of the position of persons who were members of the AC & L plan at a level of benefit in excess of the automatic acceptance level under the defendant’s policy. The terms of their acceptance under the defendant’s plan were referred to as “transfer of acceptance”, and they are at the heart of the present dispute.

The contract of insurance

5. The plaintiff relied on two alternative arguments:

(i)that the policy document issued in October 1996 contained the complete embodiment of the terms and conditions of the contract of insurance, and that recourse should be had to extrinsic evidence to identify the plaintiff as a member of the plan and the terms on which he was admitted;

alternatively –

(ii)that in consideration of Minter Ellison entering into the policy, the defendant agreed to accept as members all those persons insured under the AC & L policy, and that that agreement could be found in the following correspondence:

1. White & Lewis to Minter Ellison 8 June 1996;
2. White & Lewis to defendant 20 June 1996;
3. Defendant to White & Lewis 25 June 1996.

6. The defendant’s argument was that the contract of insurance was made in mid-1996, and that it was made by or to be inferred from the following documents:

1. Defendant to White & Lewis 16 April 1996 and enclosures: Quotation Summary, Group Salary Continuance Quotation;
2. Defendant to White & Lewis 2 May 1996;
3. Defendant to White & Lewis 3 May 1996 and enclosure: Quotation Summary;
4. White & Lewis to Minter Ellison 8 June 1996 and enclosure: schedule;
5. White & Lewis to defendant 20 June 1996 and enclosures: schedule from AC & L policy; Minter Ellison to White & Lewis 17 June 1996;
6. Defendant to White & Lewis 25 June 1996;
7. Proposal and cheque for deposit premium forwarded 8 July 1996.

The negotiations prior to 1 July 1996

7. On 1 April 1996 Minter Ellison’s brokers sought a quotation from the defendant for group life and salary continuance cover based on certain specifications. The defendant responded on 16 April 1996 providing a standard form Group Salary Continuance Quotation^[1] and a Quotation Summary in the form of a schedule with particulars relevant to the particular insured. The standard form document began –

“The following Terms and Conditions summarise the benefits under the proposed Group Salary Continuance contract. Full details of the terms of cover are set out in the Policy Document.”

The defendant indicated its willingness to accept an individual member for cover below the “automatic acceptance level” (particularised in the Quotation Summary as $8,000 per month or $96,000 per annum) without evidence of health provided certain conditions were met^[2]; beyond that level of cover, evidence of health was required^[3]. Where medical evidence was provided, once accepted the benefit would be forward underwritten up to the “dollar maximum benefit” (particularised in the Quotation Summary as $25,000 per month or $300,000 per annum) applying under the plan at the time of assessment. There was provision for acceptance of members of the AC & L plan as follows:

“2.19 Transfer of Acceptance

We guarantee to accept existing members on terms no less favourable than those imposed by the previous Insurer, irrespective of the Automatic Acceptance Level. Transfer of Acceptance conditions apply at installation for existing members only. Future increases in sums insured are subject to underwriting practices.

We would take on any forward underwritten levels, subject to confirmation in writing from the previous insurer.”

And later:

“If the Group Salary Continuance Plan is transferring from another Insurer, we require confirmation from the existing Insurer for each member, detailing:

• Level of Sum Insured
• Acceptance terms
• Forward Underwriting levels.

Provided the above information is received fully completed, the installation of the Plan would be completed within 20 working days.”^[4]

8. On 2 May 1996 the defendant wrote to Minter Ellison’s brokers:

“As discussed we are happy to offer transfer of acceptance terms to $25,000 per month to the members who were recently underwritten and accepted to $21,000 per month by AC & L.”

An amended Quotation Summary, containing details relevant to different categories of members, was forwarded the next day.

9. On 8 June 1996 the brokers wrote to Minter Ellison reporting on the negotiations. They said (inter alia):

“Transfer of Acceptance –

Under this protocol, MML^[5] will accept any member for the same level of cover or benefit, above or outside the Automatic Acceptance provisions, that was provided by the previous insurer subject to the same restrictions or premium percentage loadings applied by the previous insurer.

………………………………………..

Underwriting –

Any new member who’s [sic] benefit exceeds the AAL will be underwritten for the amount of benefit exceeding the AAL. Should he have been off work sick on his commencement date his whole benefit is subject to underwriting acceptance. A present member who is voluntarily increasing his benefit, including the addition of TPD, is subject to underwriting acceptance for the amount of the increase.”

The information required for underwriting was set out in a schedule. The letter continued:

“A copy of the Transfer Protocol has been provided to both MML and AC & L with a request that they both confirm their agreement.”

10. On 20 June 1996 the brokers asked the defendant for confirmation of the take-over terms and automatic acceptance provisions contained in the letter of 8 June 1996.

11. On 25 June 1996 the defendant wrote to the brokers (inter alia):

“I wish to confirm that Mercantile Mutual^[6] have accepted risk for the above plans^[7] taking effect from 1 July 1996.

Further, we confirm agreement to all the issues raised in your letter to Mr WJ McDonald of Minter Ellison dated 8 June 1996 including the section relating to the Automatic Acceptance Limit (AAL).

We can also confirm our agreement to the matters raised with regard to Transfer of Acceptance and Underwriting as previously discussed and agreed to with Peter Ismay.”

It enclosed proposal and other forms.

12. The proposal form was completed and signed on behalf of Minter Ellison on 3 July 1996. The proposal, together with a premium deposit of $164,111-45, was forwarded to the defendant on 8 July 1996.

Correspondence from 1 July 1996

13. On 19 August 1996 the brokers submitted to the defendant a schedule providing particulars of each member, which was used to calculate the total premium. With respect to the plaintiff, the following information was provided:

membership number000219

nameRathie D

sexM

date of birth29/05/51

date joined company26/09/94

date joined plan26/09/94

annual salary $320,000

monthly sum insured$  20,000

annual premium $    1,273-61

stamp duty$         31-84

total premium due$    1,305-45.

14. On 9 September 1996 the brokers sent the defendant an amended schedule. The particulars relating to the plaintiff were unaltered. As a result of the amendments, the total premium was reduced, resulting in an expected refund of $1,091-14.

15. There was correspondence about conditions applicable to various members, but none relevant to the plaintiff.

16. On 2 October 1996 the defendant refunded the $1,091-14.

17. On 11 October 1996 a standard form policy document was issued.

18. On 15 October 1996 the defendant wrote to the brokers advising that installation of the plan was now complete and enclosing (inter alia) a premium calculation sheet. The total premium (including stamp duty) was $163,020-31. The defendant said it was still awaiting receipt of takeover terms.

19. On 25 August 1998 the brokers sent the defendant a copy of a letter from the previous insurer AC & L dated 20 March 1996, in these terms –

“We are pleased to confirm that the following member(s) have been accepted for the following benefits under this plan:

MemberMember BenefitCurrentForwardEffective

NumberName   Level  BenefitU/W LimitDate   

    %     $   $    p.m.

000219D Rathie     7515,625    20,00027/07/95

Should you have an underwriting enquiry, please contact Paul Trigg on 239-8915.”

Issue of policy document in standard form. 

20. A standard form policy document was issued on 11 October 1996, expressed to be effective from 1 July 1996. It was headed “Group Salary Continuance Policy” and referred to an accompanying schedule containing details of the application of various expressions used in the policy to the agreement made with the particular insured.

The contract of insurance

21. By 25 June 1996 the defendant had accepted the risk as from 1 July 1996. There was then a contract, albeit conditional on receipt of the proposal form and the premium (which were submitted on 8 July 1996). It was a contract whose terms were to be found in the preceding correspondence listed in para [6] hereof and the standard form policy document (which had been incorporated by reference into the Quotation Summary sent by the defendant to the brokers on 16 April 1996). As I shall endeavour to explain, the standard form policy document issued on 11 October 1996 did not express the whole contract, relevantly because it did not contain the transfer of acceptance terms on which members of the AC & L plan were accepted as members of the defendant’s plan. Thus, even when it was adopted by the parties and acted upon, it was not a complete embodiment of the contract: cf Australian Provincial Assurance Association Limited v The Producers and Citizens Co-operative Assurance Company of Australia Limited^[8]. 

The standard form policy

22. By clause 1 of the standard form policy document the defendant agreed to insure Minter Ellison and to pay “benefits for members” on the terms of the policy. Clause 2 contained definitions including –

“Member

means a person whom We admit as a Member of the Plan under Clause 5 and who has not ceased to be a Member of the Plan under Clause 7^[9].

Plan

means the arrangement between You and Us for the provision of insurance to You and of Benefits for Members under the terms of this Policy.”

23. By clause 9.1 the defendant undertook as follows –

“9.1We will pay Benefits during the Benefit Period, if the Member suffers from a Total Disability if the sickness or injury first occurs after the date of Admission. The Benefits are subject to the Maximum Benefit Scale and the Dollar Maximum Benefit set out in the Schedule.”

The relevant “Benefit Period” was “to age 65”.^[10]

24. Relevant definitions in clause 2 of the policy and corresponding entries in the schedule were as follows –

Benefit

Definition in clause 2:

means the amount of monthly income payments We have agreed to pay with respect to a Member as indicated in the Schedule.

Entry in schedule:

75% of Salary payable in monthly instalments. Benefits are subject to the Maximum Benefit Scale and the Dollar Maximum Benefit

Maximum Benefit Scale

Definition in clause 2:

means the proportion of Salary as set out in the Schedule or its monthly equivalent where the context permits

Entry in schedule:

75% of Salary earned prior to a Member’s Disability

Dollar Maximum Benefit

Definition in clause 2:

means the maximum Benefit which We would pay under this Policy to You as set out in the Schedule.

Entry in schedule:

$25,000 per month

25. “Salary” was defined in a rider to the policy (effective from its inception) as follows _

“For a partner, ‘Salary’ shall mean:

The insured persons budgeted share of the profits of the firm and its associated entities for the financial year in which he/she becomes totally disabled within the meaning of this Policy, whether payable to him/her and/or his/her nominee.”

The plaintiff’s budgeted share of profits of Minter Ellison and its associated entities was –

01.07.95 – 30.06.96 $250,000

01.07.96 – 30.06.97$320,000

01.07.97 – 30.06.98$450,000.

26. Clause 5 provided for the admission of new members. By clause 6 the defendant agreed to accept a member “at a Benefit level up to the Automatic Acceptance Level” (which was $8,000 benefit per month) without any evidence of health. If the defendant were asked to extend the cover to benefits for that person beyond that level, it would notify the insured of additional information required, and in due course of whether it was prepared to extend cover beyond that level. Minter Ellison could request a variation of the benefit for a member on the Annual Review Date (an agreed date for review of benefits and premiums).

Transfer of Acceptance

27. It was the common intention of the defendant and Minter Ellison that at the inception of the insurance there would be persons admitted as members above the automatic acceptance level, viz those who had been covered by the AC & L policy. There were at least two groups of such persons:

1. those underwritten and accepted by AC & L to $21,000 per month – to whom the defendant extended “transfer of acceptance terms to $25,000 per month”^[11]; and

2. those like the plaintiff, underwritten and accepted by AC & L for less than $21,000 per month – whom the defendant accepted “for the same level of cover or benefit, above or outside the Automatic Acceptance provisions, that was provided by the previous insurer”.^[12]

The rival contentions

28. The plaintiff’s contention is that he was automatically accepted as a member under the defendant’s policy, to the same level of cover or benefit he enjoyed under the AC & L policy without the need for underwriting. That benefit was, he contends, “75% of salary” (whatever dollar amount that represented) subject to the dollar maximum benefit in the defendant’s policy ($25,000-00 per month). At the time he became disabled, his budgeted share of the profits of Minter Ellison was $450,000 per annum. He contends that Minter Ellison would therefore have been entitled to $28,125 per month, but for the dollar maximum benefit of $25,000 per month.

29. The defendant’s contention is that it had agreed to accept the plaintiff up to the level of benefits at which he had been accepted by AC & L – a current benefit of $15,625-00 per month with the potential for that to increase without further underwriting up to $20,000-00 per month. (That is, if the salary increased to the point where 75% of the salary was $20,000-00, the benefit would rise accordingly, but if the salary increased further, the benefit would not increase beyond $20,000 without further underwriting.)

30. In the plaintiff's submission the critical question is whether the benefit in respect of him under the AC & L policy was an amount or a formula. In his submission it was a formula (75% of salary) regardless of underwriting limits.  The defendant submits that the plaintiff had been accepted for a benefit in a certain amount, namely, $15,625, and that he had been approved for further increases in the amount of the benefit only up to $20,000. Thus it is necessary to consider the terms of the AC & L policy.

31. "Benefit" was defined as

"the monthly amount we pay you if the person insured is totally disabled ..... It is called “the benefit” and is based on the percentage of the person insured's monthly income as shown in box 7 in the Schedule..."^[13]

This definition was very similar to that in the defendant's policy. ("Income" was defined in the AC & L policy quite differently from "salary" under the defendant's policy, but this was not an issue raised in argument.)

32. By clause 6 "acceptance terms" (ie underwriting requirements) applied in some cases:

"6.  ACCEPTANCE TERMS

Where the policy refers to “acceptance terms”, it means that we will only agree to provide the benefit or an increase in the benefit, as the case may be, on certain conditions. 

When do acceptance terms apply?

■  When the amount of the benefit, or any increase in the benefit, exceeds the automatic acceptance limit shown in box 6 in the Schedule, acceptance terms apply to the excess;

■  When the automatic acceptance limit is nil, or if you don’t comply with the terms on which we offer the automatic acceptance limit, acceptance terms apply to the full amount of the benefit, and any increase in the benefit;

■  when an increase in the amount of the benefit is other than as a result of any formula applying to the benefit, acceptance terms apply to the increase; or

■  when the amount of the benefit for a person insured is reduced to nil for a period of time, acceptance terms apply before the amount of the benefit can be increased.” 

The clause went on –

“What happens if acceptance terms apply?

If acceptance terms apply, we will only agree to provide the benefit, or an increase in the benefit, as the case may be if:

■  you and the person insured (or the eligible person) complete the forms and provide the information we need for our assessment (We will tell you what information we need); and

■  we approve the benefit, or the increase in the benefit, as the case may be.

We will notify you (in writing) when we accept, limit, or reject cover for the benefit, or the increase in the benefit.  If we accept the cover, we will also tell you:

■  when the cover for the benefit, or the increase, starts; and

■  if we have approved further increases in the benefit to a higher amount.  If we do this, acceptance terms will not apply to those increases up to that higher amount.” 

33. The letter of 20 March 1996 was the end product of the application of clauses 5 and 6 in relation to the plaintiff.  AC & L was notifying the insured that it had accepted cover for a benefit in the amount of $15,625, and that it had approved further increases in the benefit to $20,000. That is, as the plaintiff's salary rose, AC & L would automatically increase the benefit to the point where 75% of salary equalled $20,000, but it would not increase it beyond that point without further underwriting.

34. The words "cover" and "benefit" are not used interchangeably in either the AC & L policy or the defendant's policy. "Cover" is used in the sense of insurance or obligation to make a payment or payments if a member becomes disabled, while "benefit" is used to connote what must be paid. For example, the AC & L policy refers to "cover for the benefit"^[14], and the defendant's policy refers to "the terms and extent of cover of the Benefits"^[15]  and information required "to extend the cover to Benefits above the Automatic Acceptance Level"^[16].

35. In my view the documents comprising the contract of insurance are to be read together; in particular, the reference to the “level of cover or benefit… that was provided by the previous insurer” in the letter of 8 June 1996 is to be read with clause 2.19 of the Group Salary Continuance Quotation issued on 16 April 1996 as together constituting the transfer of acceptance provision to which the parties agreed. But if the agreement was only as to the provision in the letter of 8 June 1996, recourse may properly be had to the prior document in ascertaining its true meaning. Not only does the earlier document go to the objective aim of the provision; as the rival contentions as to its true interpretation amply demonstrate, the provision is ambiguous: see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales;^[17] Royal Botanic Gardens and Domain Trust v South Sydney City Council.^[18] On the other hand, resort should not be had to the correspondence and enclosed schedules emanating from the broker after 1 July 1996. As a matter of principle evidence of post-contract conduct is probably not admissible to aid in the interpretation of a contract.^[19]  At any rate, the evidence discloses no more than the insured's subjective view of the meaning of the provision^[20].

36. AC & L accepted cover for a current benefit of $15,625 (arrived at by application of the formula "75% of salary"): that is, it undertook to pay such a benefit in the event the plaintiff became totally disabled. Further it accepted cover for increases in the benefit (similarly arrived at) up to $20,000 without further underwriting. Under the defendant's standard form policy, underwriting requirements would normally apply both to such an initial benefit^[21] and to such an increase.^[22] However, the defendant agreed "to accept existing members on terms no less favourable than those imposed by [AC & L]", and it expressly agreed to take on forward underwritten levels, subject to confirmation from AC & L.^[23] In other words, it was obliged to accept cover for the plaintiff initially for a benefit of $15,625 without underwriting requirements, and it was further obliged, as his income rose, to accept cover for him for benefits up to $20,000 without underwriting requirements.

37. In fact the plaintiff's budgeted share of profits for the year 1 July 1996 to 30 June 1997 was $320,000. It was co-incidental that $20,000 was both 75% of his monthly income and the forward underwritten limit.

38. For the foregoing reasons, I reject the plaintiff's contention, and find that upon his becoming disabled the benefit payable in respect of him was $20,000 per month.

Replacement policy

39. The plaintiff became totally disabled in August 1997. Minter Ellison made a claim in respect of him approximately a year later, on 18 August 1998.

40. On 17 February 1999 the defendant issued a replacement policy, effective from 1 July 1998. Its terms were the same as those in the original policy document, but for some presently inconsequential drafting changes. In the schedule $27,083 per month was substituted for $25,000 per month as the Dollar Maximum Benefit.

41. I reject the plaintiff's contention that after 30 June 1998 the benefit payable in respect of him was $27,083 per month. Minter Ellison's entitlement to a benefit in respect of him arose under the policy in force at the time he became disabled, and as I have already decided, it did not go beyond $20,000 per month.  The plaintiff ceased to be a member under the policy when he ceased to be employed full-time, although the defendant's obligation to pay benefits in respect of him will continue until he reaches the age of 65: clause 7. The replacement policy was a completely new policy issued long after he had become disabled; he never became a member under the replacement policy.

Orders

42. The relief sought is declaratory. I will ask counsel to submit a draft order.

Costs

43. Costs should follow the event.

44. At the conclusion of the oral argument, it was foreshadowed that the parties would exchange amended pleadings, because the argument had gone beyond the existing statement of claim. That was done, and there being no objection, I formally give the parties leave to file the amended pleadings. The parties also made further written submissions. The defendant's further submissions addressed the plaintiff's case as pleaded in the amended statement of claim.

45. The plaintiff should pay the defendant's costs of and resulting from the amended pleadings, including the costs of amending the defence and preparing the further submissions, such costs to be assessed on the standard basis.

Addendum – 27 April 2004

46. On 8 April 2004 I gave reasons why the plaintiff's claims for declaratory relief should be dismissed. At the end of those reasons I dealt with the question of costs and I asked counsel to submit a draft order. I was then informed that there had been an offer to settle which might be relevant to the question of costs. I indicated that I would receive further submissions on costs if the parties could not agree. This matter has come back before me this afternoon on the question of costs.

47. The proceeding was commenced in 1999. On 20 May 2002, the defendant offered to settle on the following terms:

1. That the action be dismissed by consent.
2. That each party bear its own costs of and incidental to the action.

48. That offer was not accepted. The matter went to trial earlier this year. As I have said, the plaintiff was unsuccessful in his claims for declaratory relief. The defendant submits that the plaintiff should be ordered to pay the defendant's costs up to the service of the offer to settle on the standard basis and thereafter on the indemnity basis. The plaintiff acknowledges his liability for costs, but says they should all be on the standard basis.

49. The defendant purports to rely on rule 361 of the Uniform Civil Procedure Rules.  Subrules (1) and (2) provide:

"(1) This rule applies if –

(a)the defendant makes an offer to settle that is not accepted by the plaintiff and the plaintiff obtains a judgment that is not more favourable to the plaintiff than the offer to settle; and

(b)the court is satisfied that the defendant was at all material times willing and able to carry out what was proposed in the offer.

(2) Unless a party shows another order for costs is appropriate in the circumstances, the court must –

(a)order the defendant to pay the plaintiff's costs, calculated on the standard basis, up to and including the day of service of the offer to settle; and

(b)order the plaintiff to pay the defendant's costs, calculated on the standard basis, after the day of service of the offer to settle."

50. The defendant submits that this rule applies in the present circumstances. Its counsel submits that where declaratory relief is sought by a plaintiff and the plaintiff is wholly unsuccessful, such an offer would be meaningless if there were no consequence in costs. Subrule (2) provides that unless another order for costs is appropriate, the defendant is to pay the plaintiff's costs up to the service of the offer to settle on the standard basis and the plaintiff is to pay the defendant's costs thereafter on the standard basis.

51. Counsel for the defendant submits that here another order is appropriate. The other order which he submits is appropriate is that the plaintiff pay the defendant's costs from the service of the offer to settle on the indemnity basis.

52. The plaintiff's counsel submits that rule 361 does not apply in the circumstances. He submits that the plaintiff has not obtained a judgment - his claim has been dismissed. In his submission rule 361 applies where the plaintiff wins something, but the defendant has offered more. This is not such a case. It follows, in his submission, that the question of costs is to be determined in the exercise of the Court's general discretion with respect to costs.

53. I accept the submissions of counsel for the plaintiff with respect to the interpretation of rule 361. Indeed, in Emanuel Management Pty Ltd (in liquidation) v. Foster's Brewing Group Limited [2003] QSC 299, Chesterman J. made the same point at paragraph 36 where he said that the rule was not applicable because the plaintiffs had not obtained any judgment.

54. Turning then to the general discretion of the Court with respect to costs, I was referred to two cases, McKerlie v. New South Wales (No 2) [2000] NSWSC 1159, a decision of Dunford J. of the New South Wales Supreme Court and ACCC v. Universal Music Australia Pty Ltd (No 2) [2002] FCA 192, a decision of  Hill J. of the Federal Court.  They were both concerned with Calderbank offers to settle on the basis of both parties walking away from the litigation bearing their own costs.  In each case the Judge took the view that there had not been any real compromise offered.

55. I am inclined to agree with Chesterman J. in Emanuel, that these cases should not be approached on the basis of there being any "rule" as to the appropriate order for costs in such a case.  All of the circumstances need to be taken into account.

56. It is true that the plaintiff has totally failed in his claim for declaratory relief. However, it could not be said that his case was hopeless from the start. It involved questions of what constituted the contract of insurance and the interpretation of that contract. Further, there was nothing in the conduct of the litigation by the plaintiff calling for sanction by way of indemnity costs.

57. In all the circumstances, I am unpersuaded that any order for costs, other than on the standard basis, is appropriate.