AILA National Conference 2019
Opening Address
James Allsop*
Thank you for inviting me to open this conference. I extend a warm welcome to everyone who is in attendance today. I pay respect to the traditional and original owners of this land, the Muwinina people. I pay respect to those that have passed before us and acknowledge today’s Tasmanian Aboriginal people who are the custodians of this land.
The theme of this year’s conference is “Off the Map – Charting New Territory”. A number of complex and rapidly changing areas are being scrutinized, from defamation and class actions to cyber security and the implications of climate change on trade, infrastructure and stranded assets. 
Change seems to occur at an ever more rapid pace in the modern world, and with it, the myriad manifestations of risk. The place of risk as at the very heart of insurance law and practice, at least, has not changed. The concern with risk is ancient. Take the uniquely maritime concept of general average, for example. General average has origins in the laws of the maritime city of Rhodes, and this has been acknowledged over the centuries. It is the “system of maritime law by which sacrifices of property made, and loss and expenditure incurred, as a direct result of actions taken for the purpose of preserving a common maritime adventure from peril are rateably shared between all those whose property is at risk in the adventure.” The substance of the rules of general average today remain consistent with the original Rhodian origins. It was really an early form of marine insurance, charting new ground, which has persisted to today. Much of the modern law of general average is now governed by a set of rules known as the York-Antwerp Rules that are incorporated into shipping contracts. 
So, risk is not new. Quantification and monetisation of risk is not new. Rather, what makes the areas of discussion at this conference a “charting of new territory” is that risk is manifesting in ever more different and challenging ways: whether due to technological advances, structural market change, politics, transformation of mediums of communication, or government and legislative intervention. I wish to touch upon a few of the topics of discussion at the conference before I turn briefly to  discuss recent amendments to the Insurance Contracts Act 1984 (Cth).
First, new technologies. The so-called phenomenon of “innovation leading and regulation following”, caused by rapid technological advances and intra-industry structural changes, has been labelled one of the top areas in the future of risk. Autonomous vehicles, or driverless cars, are a good example of how challenging it can be to create a regulatory framework to manage the risks of innovative new products. Should autonomous cars be allowed on the road without a person inside it capable of taking control of the car? What happens if a car malfunctions and causes a collision? From both a criminal and civil perspective, and in turn an insurance perspective, who is liable: the car manufacturer, the passenger, both? I believe there will be an insightful panel session on this topic later today.
The second area I would like to touch upon is the increasing opaqueness in consumer transactions. That is, as consumers move to online purchases and services, how does a business ensure the consumer is fully aware of the terms and conditions involved; and not just aware of them, but also possessing a sufficient level of understanding in respect of those terms and conditions?
Parliament in recent times has expressed values in statutes more frequently than in years gone by. Importantly, good faith and unconscionability (decoupled from, but still closely related to, their common law and equitable anchors) have been introduced into Commonwealth statutes governing business behaviour. The Competition and Consumer Act 2010 (Cth) and the ASIC Act 2001 (Cth) are the most obvious examples of this, and they take their place embedded in the fundamental values of law and equity. The statutes are both general and specific about this. The general norms were discussed by the Full Federal Court in cases such as Paciocco and Kojic, where it was said:
… The evaluation [of unconscionability] includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and exercise of power and discretion based thereon.
The statute also descends to specificity in provisions such as s 12CC of the ASIC Act and s 22 of the Australian Consumer Law, looking at factors such as strength of bargaining position, pressure, unreasonable non-disclosure and the intelligibility of documents. From these one does not pick and choose. All the circumstances must be examined and evaluated. These factors are not a closed, nor an exclusive, universe. But notice that they all deal in some way with the exercise of economic and private power.
As you will know, relatively recently in 2016, the unfair contracts regime in the Australian Consumer Law was extended from only applying to standard form contracts with consumers to those with small businesses. That is, contracts for the supply of goods or services, or a sale or grant of an interest in land, where one of the parties is a business employing fewer than 20 persons and the upfront price payable is within a set limit. So, what is an unfair consumer or small business contract? Section 24 of the Australian Consumer Law requires that a number of factors be considered and satisfied: a significant imbalance in the parties’ rights and obligations arising under the contract; the contract not being reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; the cause of detriment (financial or otherwise) to a party; the extent to which the allegedly unfair term is transparent; and the contract as a whole. The meaning of “transparent” is defined and rather self-explanatory: it asks whether the term is legible, is expressed clearly and in reasonably plain language, and is readily available to any party that is affected by the term.
One can see the relation between these factors in the unfair contracts regime, and those factors set out in statutory unconscionability provisions. Both stem, fundamentally, from the upholding of good commercial conscience. Now, those participating in commercial life and in the insurance industry have always appreciated that trust and honesty are at the heart of business goodwill, the institution of insurance and reduction of risk. This should be reflected in commercial law and commercial behaviour. The statutory imposition of normative standards in commercial dealings, with value-based content derived from equity and common law, but especially the former, brings with it the need to consider in more substance and depth the need to act, as a business, in good conscience. Put another way, it generates an additional operational risk. And while terms like “transparent” may be sufficiently clear and self-explanatory, there remains significant confusion and divergence as to what the broader concepts of “unconscionability” and “unfairness” mean. What is unconscionability? This question was the subject of some divergence in the High Court in the recent case of Kobelt. I will not dwell on this case today, other than to make some comments about unconscionability as a concept.
Unconscionability is less precise or has less shape than “misleading or deceptive”. It is more precise or has more shape than conduct that is merely unfair. Decoupled from a doctrine to set aside a transaction where it was a basis for relief, it has, in statute, become a basis for a civil penalty; a body of conduct directed to a norm of right behaviour. It is not to be defined because it is indefinable. Vital to the evaluation of whether conduct in business is unconscionable, and to understanding unconscionability itself, is the proper approach to the task. You should approach the task as clients or practitioners by looking at all the facts, as a whole. Do not isolate constituent parts. The conclusion is an overall evaluation. 
A majority of the High Court in Kobelt may be seen to require in the statutory standard some special disadvantage in those the subject of the conduct. The validity of this will be worked through over time.
An appreciation of the technique to approach the evaluation helps one understand the nature and character of the norm being investigated and assessed.  It is essential not to deconstruct or abstract the judgment or assessment, nor to seek to reduce it to a false certainty by seeking out some defining element. It is human behaviour that is to be evaluated and characterized. To behave unconscionably should be seen, as part of its essential conception, as serious, often involving dishonesty, predation, sharp practice, unfairness of a significant order, a lack of good faith, or the exercise of economic power in a way worthy of criticism. None of these phrases is definitional. They are all the kinds of behaviour that, viewed in all the circumstances, may lead to an articulated evaluation of unconscionability. They are standards at the heart of commercial decent behaviour.  
This brings me to non-financial risk; specifically that connected to reputational damage and loss of trust. The management of non-financial risk in the post-Royal Commission world will be addressed in depth on the final day of this conference. It is an important point of discussion. Will the Royal Commission generate a sustained impetus for businesses to address non-financial risk in human terms before it can manifest in financial loss? 
I say “in human terms” because I do not think it will be of assistance to view non-financial risk as an abstracted risk, separate from the human relationships with which it is concerned. When I speak of non-financial risk, much of what I refer to is trust; and a lack thereof. The financial services sector is one of the least trusted sectors globally. As such, speaking of non-financial risk purely in terms of risk and potential financial loss is not helpful. It narrows the focus, and can lead one into error by suggesting that such problems can be dealt with in the same way as other operational risks; through security systems, checks and balances along the way. But that is not so. To address issues of trust, public confidence in institutions, whether private or public, those institutions need holistically to reconceptualise their approach to appropriate and conscionable commercial dealings. One can see statute fall into the trap of over-articulating and -abstracting in an attempt to enforce good behaviour by companies and their employees. I venture to suggest that many of the commercial problems of corporate and financial regulation exposed in the recent Royal Commission would be made more ruthlessly manageable by a full understanding and a daily application of the fiduciary principle, rather than by ever more detailed regulation which has as its (false) working assumption the ability exhaustively to define good faith, fiduciary responsibility, and behaviour in good commercial conscience. 
After all, good faith is not a new concept. In the insurance context, it was over 250 years ago that Lord Mansfield in Carter v Boehm cemented the principle that parties to an insurance contract owe each other duties of utmost good faith. Most of you will be aware of the facts of this case. Self-appointed Governor of Fort Malborough (now Bengkulu) in Indonesia, Mr Carter (who was not in fact a Governor but an employee of the British East India Company) took out an insurance policy against Fort Malborough. The evidence showed he was aware that the French were likely to attack and that the fort, while built to withstand attacks from the Indigenous peoples, was not built to resist the resources of European enemies. Mr Carter did not disclose this information to the insurer. 
This was during the Seven Years’ War, 1756–1763. It is worth taking a slight detour to note how significant this war was. It involved all of the great European powers at the time and spanned five continents. Very historically interesting coalitions were formed by England and France, on separate sides of this conflict. The outcome of the war destroyed France’s supremacy in Europe and its Treasury (with dire consequences a generation later), also wrecked the Treasury of Great Britain, and substantially altered the balance of power in Europe. It resulted in the new taxation by Britain in the American colonies; which in turn contributed in causing the American Revolution.
Now, insurance and war have gone hand in hand for centuries. In 1467, Genoese law prohibited the making of insurance policies based on the outcomes of battles. Insurance and wagers based on the outcomes of war remained unregulated in England until the early 18th century. The second siege of Limerick in 1691, during the Williamite War in Ireland (1689-1691)? Well, it had no less than 200,000 pounds wagered on its outcome.
Wars can also create some very important judicial decisions. In this case, an important precedent was created because the French attacked Mr Carter’s Fort Malborough, and they won. Mr Carter lodged a claim with his insurer, which was denied. The matter, following the ill-fated path of many claims, proceeded to litigation. 
In finding for the insurer, Lord Mansfield found that Mr Carter had failed in his duty of utmost good faith in failing to disclose these material facts, stating:
Insurance is a contract based upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque as if it did not exist.
Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.
The duty of utmost good faith described by Lord Mansfield applied to situations where an insured failed to disclose material facts as well as where an insurer asserted a right to avoid for non-disclosure in circumstances where doing so would be against good conscience. However, the duty has historically largely been relied upon by insurers. This is understandable; under common law, the primary form of relief for an insured when an insurer breached any duty of good faith was to avoid the policy. That would be of little use. That is, until, following a recommendation by the Australian Law Reform Commission, the duty of utmost good faith was statutorily implied into insurance contracts. And so we come to section 13 of the Insurance Contracts Act, under which an insured is entitled to recover damages in cases where the insurer breaches the duty of utmost good faith. 
I think it very valuable that the duty of utmost good faith has not been over-articulated. A number of judgments, largely dealing with TPD claims, have established that when determining a claim for TPD benefits, the insurer must, broadly: act reasonably; apply the policy wording correctly; consider all relevant material; and give the relevant individual an opportunity to respond to adverse information. This process also requires more than mere honesty by the insurer. As the High Court bench in the 2007 case CGU v AMP unanimously confirmed, an absence of good faith is not limited to dishonesty. Rather, “utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests…consistently with commercial standards of decency and fairness.” 
In that case, the High Court then made the comment that the Insurance Contracts Act did not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. Interestingly, a punitive element has since been incorporated. This brings me to the recent amendments to the Insurance Contracts Act.
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) amended the Insurance Contracts Act to – among other things – permit ASIC to take steps where an insurer fails to comply with the duty of the utmost good faith in handling claims. This new provision permits the court to impose a civil penalty for such conduct of the greater of 5000 penalty units ($1,050,000 at present), or alternatively, under the new Part IXA, “Enforcement”, impose a pecuniary penalty. Under s 75D, a pecuniary penalty may be applicable to the contravention of a civil penalty provision. I note that only ASIC has the power to apply for pecuniary penalty orders, not an insured party. 
For bodies corporate (covering most insurers), this pecuniary penalty is the greatest of three options:
(a)	The penalty specified for the civil penalty provision, multiplied by 10.
(b)	If the court can determine the benefit derived and detriment avoided because of the contravention – that amount multiplied by 3.
(c)	Either: 
(i)	10% of the annual turnover of the body corporate for the 12‑month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision; or
(ii)	if the amount worked out under subparagraph (i) is greater than an amount equal to 2.5 million penalty units – 2.5 million penalty units.
The penalty for the civil penalty provision multiplied by ten comes to $10,050,000. The penalty generated by 2.5 million penalty units, ostensibly the maximum penalty which can be imposed under this provision, comes to over half a billion dollars. Not a measly sum. 
The introduction of pecuniary penalties to the Insurance Contracts Act and other legislation is a direct result of the Royal Commission. The Treasurer stated in the opening of the Minister’s second reading speech: 
It is clear, through the work of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, that some financial institutions have engaged in conduct that falls well short of community expectations. This is not acceptable. This bill delivers a clear message to those financial institutions and individuals that complying with the law is not negotiable. If the law is breached, the courts will have a broader range of penalties to impose, which will act as a significant deterrent.
The amending Act received Royal Assent on 12 March 2019. I am not aware that any proceedings by ASIC seeking pecuniary penalties under the Insurance Contracts Act have been commenced in the Federal Court, and I will not speculate much further on the development other than to say that the introduction of these provisions create very real financial consequences for conduct which, when judged against societal standards of decency and fairness, falls short. The statute turns the non-financial risk of misbehaving (whether intentionally or not) into quite a tangible financial risk.
Good faith, in terms of cooperation between parties, lies at the heart of litigation in the Federal Court of Australia. It is also particularly important in the Insurance List, of which many of you will be aware. 
The Insurance List is a specialised list designed to provide swift and cost-effective resolution of disputes that can be potentially very complex. It was established after consultation with brokers, insurers and experienced solicitors in a number of cities in Australia and in London, for the purpose of creating a focused list to deal with short insurance claims in an efficient, cost-effective and flexible manner. It is particularly useful for the resolution of specific legal issues, such as policy interpretation or the operation of insurance legislation, without the need for a full-blown hearing. This means critical issues that can essentially make or break a claim or defence can be dealt with discretely and swiftly without incurring inordinate expense.
Over 50 matters have been dealt with by the List. I conduct initial case management of all matters. In many cases, attentive case management, through which issues can be condensed and clarified, is sufficient to bring the parties to a position from which they can negotiate or mediate, and successfully settle the matter without going to hearing. In others, I either hear the discrete questions of law myself or allocate the matter to a relevantly experienced judge for hearing. 
We have finalised matters filed from Perth, Sydney, Melbourne, Brisbane and this beautiful city of Hobart. We have addressed various important issues, including questions of policy construction in claims made under policies and issues involving the Insurance Contracts Act 1984 (Cth); the approval of schemes for transfer of insurance business under Div 3A of Part III of the Insurance Act 1973 (Cth); applications in relation to life insurance proceeds under s 215 of the Life Insurance Act 1995 (Cth); disqualifications under s 26 of the Insurance Act 1973 (Cth); appeals from the Superannuation Complaints Tribunal; and applications for preliminary discovery relating to insurance. In 2018, a Full Court was assembled to deal with a question which had not previously received judicial attention: whether a final adjudication clause in a conduct exclusion prevents underwriters from relying on their statutory right to avoid a policy for fraudulent non-disclosure. (The answer was “no”.)  
More recently, a question of the Federal Court’s jurisdiction arose. The applicant initiated proceedings in the Insurance List seeking declaratory relief in relation to the proper construction of policies of insurance and reinsurance. The claim was large – over £357 million. The respondents filed interlocutory applications asserting that the Court lacked jurisdiction because of the absence of a “matter”. Part of that argument arose from the fact that the applicant only sought declaratory relief against the insurer and reinsurers as to the proper construction of certain clauses of the policies. As you can imagine, in the context of the List, this was a very important question, where much of the utility of proceedings comes from being able to deal with focused legal issues separately from the body of a matter so as to enable the just, quick and effective resolution of disputes while minimising the time spent unnecessarily litigating. (Luckily for all those in this room who have used, or will one day use, the mechanisms of the Insurance List, I was ultimately satisfied that the whole of the controversy arose under a law of the Parliament, and so the Court did have jurisdiction.)
The presence and development of the issues discussed at this year’s AILA Conference make all the more necessary a specialised commercial List which has the capacity to deal with all the sorts of subtleties that arise in insurance cases. And so we come full circle: to the new and evolving risks that those in this room – actuaries, solicitors, barristers, clients, judges, consumers – will be dealing with going into the future. I look forward to hearing the insights of those presenting at the Conference, as I am sure you do too.
Thank you.

Hobart
30 October 2019