The insurance sector in Australia plays an important role in the country’s financial service market (Kellam, 2011, p.1). This sector depends on insurance agents and brokers to plan, market and distribute their products and services in the Australian market (Anne, 2010, p.332). However, numerous cases abound where insurance brokers have failed to discharge their duties in a proper way. This paper will focus on one particular case illustrated below.
Con-Stan Industries of Australia Pty Ltd (Con-Stan) solicited services of an insurance broker to advice it on suitable insurance products for a variety of risks. Norwich was selected by the insurance broker to underwrite Con-Stan. The latter that insurance premiums submitted to the brokerage firm failed to submit payment to Norwich. Later on, the brokerage firm went into bankruptcy and Con-Stan was sued for unpaid insurance premiums by Norwich. However, Con-Stan disputed that there was an oblique term in the insurance agreement, as it was obligated only to remit insurance premiums to the broker (Doyle, 2007, p.1). However, the court discovered later that the implied term, contained in the contract, was neither agreed upon by all parties, nor was a standard in the insurance sector. Hence, the failure by the brokerage firm to remit insurance premiums to Norwich did not release Con-Stan’s from its obligations (Doyle, 2007, p.2).
The custom used to draft the contract was not acknowledged by all parties. As a matter of fact, there was no evidence to prove that the inclusion of the implied term in the contract was a professional custom in the insurance sector (Jackman and Faulkner, 2010, p.18). Consequently, there were no indirect terms to satisfy business efficiency, as the assumed implied term was not apparent to the parties and that it could not assume that both parties would have acknowledged the inclusion of the implied term in the agreement (Byrne, 1998, p.18). The court ruled that a term can only be implied in the agreement if the prevailing custom was acknowledged and accepted in the contract by all parties. The contracting parties should not make assumptions that oblique or obscure terms to be implied into contracts. In case they have doubts regarding implications of the implied term, it must be clearly expressed in the contract (Doyle, 2007, p.1).
The obligation for good faith in insurance agreements is not restricted to the obligation of full disclosure of material facts, but is enforced by all relevant parties. This phenomenon has been acknowledged and adopted legislatively as a professional practice in Australia’s insurance industry (Meagher, 2006, p.2). The requirement of good faith in contractual agreements does not require that a party considers the welfare of the other party. However, having given the opportunity costs of the contract, the party is prevented from using contractual powers to recover them. The court deals with the matter by assessing the basis upon which the contract was executed (Meagher, 2006, p.3).
The Australian common law makes it clear that, in a case where an insured party remits payments for premiums to an insurance broker, who becomes bankrupt before the premium is transmitted to the insurer, the insured party is legally responsible to the insurer for the unpaid premiums. In the Con-Stan Industries of Australia Pty Ltd vs. Norwich Winterthur Insurance (Aust), the court ruled that Con-Stan was legally responsible for unpaid premiums to Norwich in spite of the fact that the last one had paid the insurance broker (Anne, 2010, p.347).
Reference List
Anne, T.J. (2010) The regulation of insurance intermediaries in the Australian financial services market. Australian Business Law Review, 38, 332-350.
Byrne, J. (1998) Implied terms in building contracts: Inference or imputation? Web.
Doyle, J. (2007) Con-Stan Industries of Australia vs. Norwich Winterthur (Aust) Limited[1986] 64 ALR 481. Web.
Jackman, I. M. and Faulkner, T. M. (2010) The High Court of Australia: Sydney Office of the Registry on Appeal from the New South Wales Court of Appeal. Sydney: High Court of Australia.
Kellam, J. (2011) Market trends and regulatory framework. Web.
Meagher, D. (2006) Will good faith falter in the High court? Proceedings of the 2006 LxisNexis Professional Development Conference held in Melbourne. Melbourne: Owen Dixon Chambers West.