TAYLOR v ASTERON LIFE LIMITED [2020] NZCA 354

TAYLOR v ASTERON LIFE LIMITED [2020] NZCA 354 [19 August 2020]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA256/2019CA308/2019[2020] NZCA 354BETWEEN PETER JAMES TAYLORAppellantAND ASTERON LIFE LIMITEDRespondentHearing: 17 June 2020. Further submissions received 27 July 2020.Court: Goddard, Ellis and Katz JJCounsel: A C Beck for AppellantC M Meechan QC and A Borchardt for RespondentJudgment: 19 August 2020 at 10.00 amJUDGMENT OF THE COURTA The application for leave to adduce further evidence on appeal is declined.B The appeal is allowed in part. The judgment entered for Asteron Life Ltdon its counterclaim is modified as set out in paragraphs [187] and [188].If the parties cannot reach agreement on the consequences of thismodification for the interest component of the judgment, leave is reservedto either party to file a memorandum seeking determination by this Courtof the necessary adjustments.C The appeal is otherwise dismissed.D The appellant must pay costs to the respondent for a standard appeal ona band A basis, with usual disbursements. We certify for two counsel.____________________________________________________________________Table of contentsPara NoIntroduction and summary [1]Background [10]The Policy [20]Partial Disability Benefit [27]High Court judgment [30]Mr Taylor's claim for continuing payments [30]Asteron's counterclaim for recovery of payments made [38]Interest/costs judgment [53]Issues on appeal [56]Was Mr Taylor Totally Disabled? [58]The issue [58]Appellant's submissions [61]Analysis [64]Mr Taylor's monthly earned income [78]The issue [78]Analysis [81]Counterclaim — the legal framework [90]The insured's obligations in relation to claims [91]The insurer's right to cancel in response to a fraudulent claim [112]Was dishonesty in issue in these proceedings? [121]Did Asteron's pleading allege dishonesty? [122]Was the allegation of dishonesty adequately put to Mr Taylor? [126]Breach of Mr Taylor's obligation to act honestly in connectionwith claims [130]Cancellation [136]The issue [136]Analysis [139]What is Asteron entitled to recover? [142]The issues [142]Analysis [144]Application to adduce further evidence on appeal [150]Interest [156]Costs issues [162]Costs on appeal [182]Result [185]REASONS OF THE COURT(Given by Goddard J)Introduction and summary[1] The appellant, Mr Taylor, carried on business as an insurance broker. In 1994he took out an income protection insurance policy (the Policy) in relation to his incomefrom that business. The insurer was the respondent, Asteron Life Ltd (Asteron), whichat the time was known as Sun Alliance Life Ltd (Sun Alliance). In July 2010 Mr Taylormade a claim under the Policy, on the basis that as a result of significant medicalproblems he was totally disabled. Cover was accepted by Asteron. Mr Taylor waspaid benefits under the Policy until September 2014, when Asteron suspendedpayment.[2] Mr Taylor brought proceedings seeking a declaration that he was entitled tocontinuing benefits under the Policy, and seeking to recover arrears of payments.Asteron denied that Mr Taylor was entitled to any further payments under the Policy.Asteron counterclaimed for repayment of all sums previously paid under the Policyon the basis that Mr Taylor owed Asteron a duty of utmost good faith in connectionwith making claims, and had breached that duty by making false statements aboutthe extent to which he had worked throughout the relevant period. Mr Taylor fileda defence to the counterclaim and reply in which he denied Asteron's allegations, andpleaded various defences to the counterclaim including a change of position defence.[3] In the High Court Mr Taylor's claim was unsuccessful. Asteron's counterclaimsucceeded. Asteron was awarded the sum of $371,286.70 plus interest and costs.1In a subsequent decision Cooke J determined a number of issues relating to the awardof interest, and the costs recoverable by Asteron.2[4] Mr Taylor's appeal to this Court raises a number of issues aboutthe conclusions reached by the Judge in the High Court judgment and in theInterest/costs judgment. Mr Taylor also argues that it was wrong for the Judge to make1 Taylor v Asteron Life Ltd [2019] NZHC 978 [High Court judgment].2 Taylor v Asteron Life Ltd [2019] NZHC 1489 [Interest/costs judgment].certain findings, in particular the finding that Mr Taylor had acted dishonestly,in circumstances where that allegation was not adequately pleaded and was notsquarely put to Mr Taylor in cross-examination.[5] We agree with the Judge that Mr Taylor's claim must fail. He has notestablished that he was Totally Disabled (as that term was defined in the Policy)between September 2014, when Asteron suspended payment, and April 2016, whenAsteron cancelled the Policy. Nor does the evidence establish that Mr Taylor wasentitled to any payment during that period even if he were Totally Disabled. Rather,we agree with the Judge that Mr Taylor's income from his insurance broking businesswas at a level that resulted in full abatement of any benefits he might otherwise havebeen entitled to under the Policy during that period.[6] We also agree with the Judge that Asteron is entitled to succeed on itscounterclaim. But for reasons we explain in more detail below, we consider thatAsteron is only entitled to recover payments made in respect of periods about whichMr Taylor was found to have dishonestly provided false information. The Judgedeclined to find that the initial claim made in July 2010 involved false statements thatbreached Mr Taylor's obligations in relation to making claims. So Asteron's claim aspleaded, which was founded solely on the allegation of breach of utmost good faith,could not succeed in respect of the initial period from January 2010 to 22 July 2010.[7] There may well have been another basis on which the payments made inrespect of that period could have been recovered. But they were not pleaded byAsteron, and Asteron did not give notice that it intended to support the High Courtjudgment on grounds other than those accepted by the Judge. The judgment onAsteron's counterclaim must therefore be reduced by $51,835.64. This has flow-onconsequences for the interest calculation.[8] We also accept one of Mr Taylor's numerous challenges to the costs award inthe High Court. The costs awarded to Asteron are reduced by $1,600.[9] Mr Taylor's appeal is otherwise dismissed.Background[10] The Judge's findings in relation to the background to the Policy and toMr Taylor's claim were not challenged on appeal. The summary set out below is basedon his findings.[11] Mr Taylor commenced work as an insurance broker after leaving school andfollowing a short period of study at the University of Otago. He worked for insurancecompanies, including Asteron (then known as Sun Alliance, as noted above), optingnot to accept a salary but to be effectively self-employed. He subsequently establishedhis own broking business in Dunedin.[12] In October 1992 Mr Taylor completed an application for income protectioninsurance with Asteron. In it he described himself as self-employed, and advisedAsteron that his share of after tax earnings from his business was $75,500.He provided financial information to verify this level of income: extracts fromfinancial statements for "Peter Taylor Insurance Broker" to 31 March 1992, preparedby his accountants. They showed he had made a net profit for that year of $65,647.91.The revenue of this business included both life insurance commissions and fire andgeneral insurance commissions. The expenditure included wages and salaries foremployees. By letter dated 5 July 1994 Sun Alliance confirmed placement of thisinsurance and provided Mr Taylor with the relevant policy documents.[13] Mr Taylor continued trading as a self-employed insurance broker. In July 2010he submitted a claim under the Policy. In the claim form he said that he suffered frommedical conditions of the kind covered by the Policy. He indicated that he had stoppedall work on 23 December 2009. The claim form included a section completed byMr Taylor's general practitioner, Dr Marie Neylon. She supplied information inrelation to Mr Taylor's medical conditions and the treatment he was receiving, andindicated that Mr Taylor was first advised to cease work as a result of those conditionson 23 December 2009. Asteron accepted the claim and commenced payments,including a significant payment backdated to 21 January 2010 of $51,835.64.3[14] Mr Taylor was required to provide progress reports to Asteron describing thecurrent state of his medical condition, whether he had been able to work, what incomehe had earned from working, and certain other matters. He provided progress reportsin August, September, October, November 2010; January, February, March, April, Julyand October 2011; January, April, July and October 2012; April and October 2013;and April 2014. Further reports were provided in October and November 2014 afterAsteron stopped making payments under the Policy in September 2014.[15] By letter dated 19 May 2014 Asteron asked Mr Taylor to supply certainfinancial information. That request was repeated by letter dated 23 June 2014, andagain on 24 July 2014. By email dated 20 August 2014 Mr Taylor provided somefinancial information, including signed accounts for the year ended 31 March 2014 fora limited liability company called Peter J Taylor and Associates Ltd (the Company).They were not the accounts for Mr Taylor's insurance broking business. It appearsthat some of the commissions earned by the broking business were channelled throughthe Company. The Company accounts showed that it had made a loss.[16] Asteron then asked about commissions disclosed in these accounts that hadbeen paid into, and then out of, the Company totalling $551,491. By email dated28 August 2014 Mr Taylor responded by asking Asteron to confirm why they neededany further information. By email dated 3 September 2014 Asteron explained thatthe insurance entitlement under the Policy was subject to a deduction for the incomethat the insured earned while working. Asteron advised that it was not able to makeany further payments under the Policy until it could reconcile the claim, with aprovisional calculation showing that Mr Taylor had been overpaid by $77,398.60.3 The relevant starting date for payment of a benefit under the Policy was 21 January 2010, takinginto account the 30 day "No Pay" period provided for in the Policy.[17] By email dated 5 September 2014 Mr Taylor replied as follows:3. I have not been nor have received any income from any source other thanAsteron.5. Please note that it is manifestly obvious that given your present view andadopted position that until this can be satisfactorily addressed andresolved to reinstatement of benefits or we both are able to reachan agreement in terms of application of policy that no other detailsrequested by you will be forwarded from me.It would seem illogical to forward other detail given your suspendingpolicy entitlements until this particular matter can be resolved tosatisfaction.6. It is unequivocally the writers view that you have stepped outside ofthe bounds of the policy in force in reaching the decision conveyed, thatyou are manifestly incorrect in your assessment reached, that you areunnecessarily withholding benefit entitlements, that by your action andthe decision conveyed to withhold legitimate benefit entitlements underthe policy in force you are and have caused me (the insured) absolute andtotally unnecessary additional angst, hurt feelings, anguish andembarrassment aside from creating a totally unnecessary financialhardship resulting directly from your decision conveyed to suspendbenefit entitlements.[18] Mr Taylor then commenced these proceedings in December 2015.[19] Mr Taylor subsequently sold his broking business. It appears this sale wascompleted on 1 June 2018.The Policy[20] The Policy was described as an "Income Plan" policy. It commenced on1 August 1994 and was expressed to continue until 28 February 2026. The originalpremium payable by Mr Taylor was $85.95 per month, which was subsequentlyinflation adjusted.[21] There are two categories of cover under the Policy — a Total DisabilityBenefit, and a Partial Disability Benefit.[22] The Total Disability Benefit is described in the following clause:2.1 Total Disability BenefitIf as a result solely of any Injury or Sickness you becomeTotally Disabled then we will pay you:(a) during the Full Pay Period, a monthly Total Disability Benefitof your Monthly Insured Income and,(b) during the 75% Pay Period, a monthly Total Disability Benefitof 75% of your Monthly Insured Income, reduced in both casesby any other income you receive from any other source inrelation to:(i) the Sickness or Injury that caused you to becomeTotally Disabled, and(ii) retirement or superannuation benefits, and(iii) your Monthly Earned Income.In the event that a lump sum payment is received by you in lieu of anyincome due to you in respect of the Sickness or Injury that caused youto become Totally Disabled or from any superannuation or retirementfund, that lump sum will be deemed to be equal to a monthly income of1% of the lump sum.[23] This benefit is payable when, as a sole result of Injury or Sickness(both defined terms), the insured becomes Totally Disabled, which is defined in thefollowing terms:"TOTALLY DISABLED" means that you are unable to work in your usualoccupation for more than ten hours per week.[24] The Policy defines Monthly Insured Income as one twelfth of theAnnual Insured Income specified in the Schedule. Mr Taylor's initial Annual InsuredIncome was $75,500. This figure was subsequently inflation adjusted.[25] The Full Pay Period is 60 days.4 There is then a 75 per cent Pay Period thatcontinues through to age 65. Thus a person who is Totally Disabled will receive theirMonthly Insured Income for 60 days, followed by 75 per cent of that amount throughto age 65. That amount is subject to abatement as a result of income earned whiledisabled.4 Commencing after an initial "No Pay" period of 30 days.[26] The Policy provides for the Total Disability Benefit that is payable to bereduced by income from certain sources, including "Monthly Earned Income" definedas follows:"MONTHLY EARNED INCOME" means your monthly pre-tax salary,commissions, bonuses and fringe benefits if an employee, or your monthlypre-tax earnings net of any business expenses necessarily incurred in derivingthose earnings if a self-employed person.Partial Disability Benefit[27] The Partial Disability Benefit is payable where an insured ceases to beTotally Disabled, but becomes Partially Disabled.[28] The term Partially Disabled is defined as follows:"PARTALLY DISABLED" means that you are working in any occupation but,directly because of Sickness or Injury, you are only able to work to a limitedextent such that your Monthly Earned Income is 75% or less of yourMonthly Insured Income.[29] The key consequence of being Partially Disabled rather than Totally Disabledis that only two-thirds of the policyholder's Monthly Earned Income is deducted fromthe benefit payable.High Court judgmentMr Taylor's claim for continuing payments[30] Mr Taylor did not call any medical evidence to establish his condition.However he gave evidence about the various medical conditions from which he hassuffered. Asteron did not dispute that Mr Taylor suffered from sickness withinthe meaning of the Policy. For that reason, and despite a lack of clarity in Mr Taylor'sevidence, the Judge accepted that at all relevant times Mr Taylor suffered froma sickness as defined in the Policy, potentially enabling him to qualify fora Total Disability Benefit or Partial Disability Benefit.55 High Court judgment, above n 1, at [36].[31] The Judge next considered whether Mr Taylor was Totally Disabled withinthe meaning of the Policy. He considered the evidence of Mr Taylor himself, andthe evidence of three witnesses subpoenaed by Asteron who were employees ofMr Taylor at the relevant time. They gave evidence that Mr Taylor was activelyinvolved in all aspects of his insurance broking business. Two of these formeremployees gave evidence that Mr Taylor worked approximately four hours per day.The other former employee did not provide a quantitative estimate, but said thatMr Taylor was working significantly more than three to five hours per week.The Judge considered that the evidence of these employees was confirmed byextensive documentary evidence, including emails and other written communicationswhich showed that Mr Taylor was actively involved in his insurance business.The Judge accepted Asteron's submission that the evidence demonstrated thatMr Taylor retained responsibility for the most important clients, and clients that weremore demanding. He also gave direction to other staff. The documentary evidencedemonstrated that Mr Taylor was working extensively in the business, and that hisevidence describing far more limited activities was not accurate. The Judgesummarised his findings on this issue as follows:[46] I generally found Mr Taylor's evidence, and his answers incross-examination, unreliable, and at times not credible. His explanations forthe activities recorded in the documents varied — he argued that what he wasdoing was not work at all, that it was not the same work as he had previouslyundertaken, or that if he did work it was within the 10 hour limit. His answerswere inconsistent with both the documentary records, and the evidence ofthe three subpoenaed witnesses. Ms Tricker's evidence must be particularlysignificant in this respect given Mr Taylor's assertion that she essentially tookon the roles he could no longer perform. It is clear that apart from the periodimmediately surrounding his discectomy Mr Taylor was able to, and did infact, work for more than 10 hours a week. It is possible that there were othershort periods of total disability, but Mr Taylor has not provided sufficientlyclear evidence for me to identify them, or to identify when they took place.[47] For these reasons I find that Mr Taylor was not Totally Disabled withinthe meaning of the Policy.[32] The Judge went on to consider whether Mr Taylor was entitled toa Partial Disability Benefit. The Judge noted that the threshold for qualifying for thisbenefit is that "directly because of Sickness" Mr Taylor was "only able to work toa limited extent such that [his] Monthly Earned Income is 75 per cent or less" of hisMonthly Insured Income.6[33] In order to apply that test, the Judge had to determine a difference betweenthe parties about the interpretation of the term "Monthly Earned Income". Mr Beck,counsel for Mr Taylor, argued that this related solely to income arising fromMr Taylor's own efforts. Asteron submitted that Monthly Earned Income included allearnings net of business expenses from Mr Taylor's insurance broking business.[34] The Judge concluded that the language used in the definition ofMonthly Earned Income referred to Mr Taylor's monthly pre-tax earnings from hisbusiness, whether or not the earnings were a consequence of his own efforts, orthe efforts of his employees. He considered that approach was consistent withthe commercial purpose of the contract, as what becomes insured is the level of netincome earned from the business, and the impact of the disability of the insured personon that income.7 That reading of the Policy was confirmed by the circumstances inwhich it was entered into. In order to establish his income for the purpose of obtainingthe policy, Mr Taylor had advised Asteron that his income from his business was$75,500 per annum. The form noted that the income was verified by the balance sheethe provided. The financial statements for his insurance broking business to 31 March1992 showed a profit for that year of $65,647.91, and a profit of $50,779.68 inthe previous year. The financial statements recorded expenditure on wages.Thus, the Judge said, when the contract was entered into, both parties were aware thatthe relevant income being protected reflected the entire net profit made by the brokingbusiness known as "Peter Taylor Insurance Broker".8 The Judge summarisedthe consequences of this finding as follows:[56] So there does not seem to me to be any reason to depart fromthe ordinary meaning of the terms used in the Policy — and particularlythe definition of Monthly Earned Income — which fully corresponds tothe intention of the parties viewed in its wider context. The full amount ofthe net profit from Mr Taylor's self-employed business gets deducted fromthe prescribed benefit irrespective of any arguments that it was not the productof his own endeavours, or solely his own endeavours. The adverse event that6 At [49].7 At [53].8 At [55].Mr Taylor was insuring against was that his earnings from his business wouldbe eliminated or reduced as a consequence of his sickness or injury.[35] Mr Taylor initially discovered financial statements for his insurance brokingbusiness which, as the Judge explained in some detail, falsely represented thatthe business made trading losses. Mr Taylor subsequently discovered correct financialstatements for the business up to 31 March 2015 which showed that his income wasat a level that led to full abatement of any amounts otherwise due under the Policy.No amounts were due to Mr Taylor.9[36] The Judge noted that the financial statements before the Court only coveredthe period through to March 2015. Mr Taylor's claim for payment of arrears coveredthe period from 2014 to trial. In the absence of relevant accounting material it was notpossible to make the calculation required by Mr Taylor's claim. But in any event,the Judge said, he had determined that Mr Taylor was not disabled by his sicknessduring that period.10[37] Mr Taylor's claims were therefore dismissed.Asteron's counterclaim for recovery of payments made[38] The Judge moved on to consider Asteron's counterclaim. The Judge began byconsidering the correct legal framework for addressing the right to cancel or avoidliability under an insurance contract for a breach of the duty of good faith, and foraddressing the insurer's claims for restitution for amounts that it has paid underthe insurance contract. Asteron presented its case relying on common law principlesfound primarily in English authorities. Mr Beck argued that these issues should beaddressed within the legal framework set out in the Contract and Commercial LawAct 2017 (the CCLA), which essentially re-enacts the regime formerly set out in theContractual Remedies Act 1979.11 As the Judge noted, s 40 of the CCLA provides thatss 36 to 39 have effect in place of the rules of the common law and of equity governingthe circumstances in which a party to a contract may rescind it, or treat it as discharged,9 At [57]–[60].10 At [61].11 At [67].for misrepresentation, repudiation, or breach. The Judge summarised his conclusionon this issue as follows:[70] [Section 40] means what it says. Sections 36 to 39 deal withcancellation. In addition the Act goes on to detail the ability of the Court togrant relief following cancellation, which can include the kind ofrestitutionary award sought by Asteron here (s 43), and also deals withthe defence of change of position such as that raised by Mr Taylor (s 47).It covers the field. Subject to other legislation that may also apply (such asthe Marine Insurance Act 1908, and the Insurance Law Reform Act 1977)the Act applies to a contract of insurance just as much as any other contract.Moreover as Ms Meechan and Mr Beck agreed, all the issues that are alive inthe present case can be addressed within the provisions of the Act. I proceedon that basis.[39] It appears to have been common ground that Mr Taylor owed Asteronan obligation of utmost good faith in connection with making claims. Asteron'spleaded case was that in his claim form and subsequent reports, Mr Taylor providedincorrect information about whether he was doing any work, and how much work hewas doing. The Judge carefully reviewed the initial claim form and the subsequentprogress statements, assessing the statements made and the evidence in relation to theircorrectness.[40] The original claim form, which related to the period 23 December 2009 toJuly 2010, was dated 19 July 2010. The information contained in it was somewhatconfusing and contradictory. The Judge set out his conclusions in relation to that formas follows:[77] Some of this information is not accurate, but I am not prepared toconclude that this form involves false statements supporting a finding ofbreach of Mr Taylor's obligations. There is considerable lack of clarity aboutprecisely what Mr Taylor is saying in the form overall. He has indicated thathe has been working part-time and that he intends working more fully. I amnot satisfied there is any clearly incorrect (let alone deliberately incorrect)information, such that there was a breach of the obligation implied intothe contract. Ms Meechan emphasised that he has represented that he had onlyreturned to work on 12 July. But when describing when he stopped workinga number of dates have been initially written in, and then changed oroverwritten. Although he has indicated that he only returned to work in July(at the same time as filling in the form) I am not sure that it is as simple as thatwhen all the answers in the form overall are considered. There is also no clearrepresentation in the form that Mr Taylor is not making any money from hisbroking business.[41] However the Judge found that the subsequent progress reports contained falsestatements. He said:[81] Given the findings I have already made earlier in this judgment, it isclear that what Mr Taylor was saying in the forms is false. Whateverthe impact his conditions had had upon him, he returned to work in 2010working approximately four hours per day at home or in the office, andgenerally overseeing the overall business operation. He also engaged in otheractivities associated with other business ventures.[82] I found Mr Taylor's evidence suggesting otherwise to be unreliable,and at times untruthful. I am very conscious of the need to avoid makingfindings that a person has acted dishonestly, and that clear evidence must beprovided before reaching that conclusion. But I do not see how Mr Taylor'sinaccurate statements about his work could have been the consequence oferror. I find that they deliberately misrepresented the amount of work he wasengaged in and amounted to a breach of Mr Taylor's duties under the contract.(Footnote omitted).[42] Asteron's claim that Mr Taylor breached his obligations focussed onthe representations made by Mr Taylor about the number of hours that he worked.It did not place reliance on the statements he made about his income. Howeverthe Judge considered that these matters were inextricably interlinked, and went on toconsider the accuracy of the information provided about income. The Judge foundthat the financial statements that were initially provided in Mr Taylor's discovery forthe years 2010, 2011 and 2012 had been deliberately created by somebody to createthe false impression that Mr Taylor made operating losses, when in fact he madeoperating profits.12[43] It had not been put to Mr Taylor in cross-examination that he had been involvedin preparing the false set of accounts. The Judge considered that in light of s 92 ofthe Evidence Act 2006, it was necessary to put that proposition directly to Mr Taylorbefore it would be appropriate for the Court to reach a conclusion that he had anypersonal involvement in the preparation of the false accounting material. The Judgetherefore refrained from reaching a conclusion on this point.13[44] However putting to one side any issue emerging from the creation andprovision of the false accounts, the accurate accounts demonstrated that Mr Taylor12 At [92].13 At [94].earned income from his business which, on the application of the formula providedfor in the Policy, resulted in an abatement that removed any entitlement to receive anypayment.14[45] Asteron sought an order requiring Mr Taylor to pay back to it all the money ithad paid him under the policy, on the basis that the payments were induced by the falseclaims Mr Taylor had made about the hours he had worked. The Judge addressed thisclaim by reference to s 43 of the CCLA, which provides:43 Power of court to grant relief(1) When a contract is cancelled by any party, the court may, if it is justand practicable to do so, make an order or orders granting relief underthis section.(2) The relief may be granted in the course of any proceeding or onapplication made for the purpose.(3) An order under this section may—(a) direct a party to pay to any other party the sum that the courtthinks just (subject to section 35):(b) direct a party to do or refrain from doing, in relation to anyother party, any act or thing that the court thinks just:(c) vest the whole or any part of any relevant property in a party:(d) direct a party to transfer or assign the whole or any part of anyrelevant property to any other party:(e) direct a party to deliver the whole or any part of the possessionof any relevant property to any other party.(4) In subsection (3),—party means a party to the proceedingrelevant property means real or personal property that wasthe subject of the contract or was the whole or part ofthe consideration for the contract.[46] The Judge began by considering whether Asteron had actually cancelledthe contract. When Asteron wrote to Mr Taylor in September 2014 to say it wasmaking no more payments under the Policy, it did not say it was cancelling the Policy.14 At [95].Nor did it say this expressly in any subsequent communication addressed toMr Taylor.15[47] In Asteron's first amended statement of defence and counterclaim dated11 April 2016, Asteron pleaded that Mr Taylor had breached his obligation of utmostgood faith, and said this "entitles the defendant to cancel the policy". The Judge notedthat that pleading was served, but may not have amounted to notice of cancellationbecause it was possible to read the statement as saying no more than that Asteron wasentitled to cancel. The Judge did not consider that this was a clear communication ofactual cancellation in accordance with s 41 of the CCLA.16 However that ambiguitywas removed by the evidence of Mr Andrew Strong, the in-house solicitor dealingwith Mr Taylor's claim. In his brief of evidence dated 22 November 2018 he said thatthe position of Asteron was that it had cancelled the Policy and was seekingrepayment. The Judge was satisfied that service of this brief of evidence amounted tonotice of cancellation by Asteron within the meaning of s 41.17[48] In any event, the Judge said, even if the Policy had not been cancelled and s 43did not apply, Asteron was nevertheless able to seek damages for breach of contract ascontemplated by s 49 of the CCLA. A breach of the implied terms of the contract bymaking false claims is a breach of contract. Asteron's loss, and its claim for breach ofcontract, was equivalent to the amounts it sought by way of restitution.18[49] The Judge considered that Asteron could recover all payments under the Policy,as a result of Mr Taylor's misrepresentations. But in any event, he said, the positionconcerning restitution was straightforward because Mr Taylor never had anyentitlement under the Policy due to his income levels.19[50] Finally, the Judge considered Mr Taylor's defences to the restitution claim.He pleaded immateriality, absence of intent, and change of position. The Judge saidhe had already dealt with immateriality and absence of intent. The misstatements15 At [99].16 At [100].17 At [101].18 At [102].19 At [106]–[107].made by Mr Taylor were plainly material, and he had found that they were deliberatelyfalse.20 That left the change of position defence. This fell to be considered under s 47of the CCLA:47 Party who has altered position(1) No order may be made under section 43 in respect of any property ifany party to the contract has so altered the party's position in relationto the property that, having regard to all relevant circumstances, itwould, in the opinion of the court, be inequitable to any party to makethe order.(2) This section applies whether the party altered the party's positionbefore or after the cancellation of the contract.[51] The Judge considered that Mr Taylor had not acted in good faith. Nor didthe evidence provided by Mr Taylor establish a factual foundation for a defence ofchange of position. The Judge said:[123] For these reasons I reject Mr Taylor's defence of change of position.Primarily that is because he has not acted in good faith. He is not able to resistrepayment of money he has dishonestly secured because he says he has spentmoney on a holiday house, two luxury cars, and holidays to the Pacific.For that reason the defence is not available. Even apart from that point,however, the evidence he provided does not satisfy me that he incurred thisexpenditure in reliance upon the payments by Asteron.[52] The Judge gave judgment for the full amount claimed by Asteron in itscounterclaim: $371,286.70. He reserved leave for Asteron to file a memorandumsetting out its claim for interest. The Judge also granted leave to the parties to filememoranda in relation to costs.Interest/costs judgment[53] In the Interest/costs judgment the Judge awarded interest under s 87 ofthe Judicature Act 1908 at a rate of five per cent per annum. The Judge did not acceptMr Taylor's submission that interest should be calculated using the interest calculatoravailable under the Interest on Money Claims Act 2016. The Judge considered thatthis was a case where Mr Taylor had received payments to which he was not entitled.20 At [108].He had the advantage of the use of that money. Requiring repayment at a five per centper annum interest rate did not involve over-compensation.21[54] The Judge also rejected submissions made by Mr Taylor in relation to delaysin the proceeding, which Mr Taylor said should preclude an award of interest toAsteron for the whole period, and in relation to over-payment of premiums. The Judgesaw no significance in the point about delay, and considered that the plaintiff's stanceon disclosing information to Asteron was also a cause of delay in the matter comingto court. He accepted Asteron's submission that the Court had no evidence aboutpremium payments sufficient to affect the interest calculation.22[55] The Judge determined a number of disputed items of costs. Some of these arethe subject of the appeal to this Court, and are addressed below. The most significantissue concerned Asteron's application for a 15 per cent uplift on its costs award underr 14.6(3)(b) of the High Court Rules 2016. The Judge considered that an uplift of15 per cent was relatively modest, and was justified. The Judge said:[10] In responding to these arguments it seems to me to be appropriate toproceed with caution. In Paper Reclaim Ltd v Aotearoa International Ltdthe Court of Appeal overturned an award of indemnity costs becausethe High Court had made unjustified findings in relation to the honesty wherethe underlying claims were still properly advanced in the proceeding.23The pursuit of proper claims should not be penalised. Nevertheless I amsatisfied that it is appropriate for there to be an uplift of the costs award inthe present case given that costs of the litigation were increased byunmeritorious arguments. In particular:(a) The plaintiff had made deliberately false claims, and then gaveevidence, that I found unreliable and at times not credible, that he hadnot been working in any meaningful capacity. He must have knownthat the claim lacked merit. To respond to this the defendants wererequired to undertake an extensive forensic exercise, including bysubpoenaing his employees to demonstrate that this was not true.(b) In any event his income was not adversely affected by any issue ofincapacitation. That fact was obscured by the discovery of false setsof accounts. The defendant was required to call expert accountingevidence to explore that point. Even at trial the plaintiff called hisown accountant to explain the accounts so discovered were earlierdraft iterations. This further evidence was demonstrated to beincorrect.21 Interest/costs judgment, above n 2, at [4].22 At [3].23 Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 (CA) at [143]–[161].[11] The key point is that the plaintiff was advancing false claims forinsurance entitlements. The pursuit of the claim can be seen as a continuationof the attempt to falsely claim entitlements. Given my findings, the plaintiff'sclaim was not properly brought. The defendant was put to considerable costto demonstrate why the claims were illegitimate. In those circumstancesan uplift to reflect the additional expense they were required to undertake isjustified.Issues on appeal[56] Mr Taylor submits that the High Court erred in seven respects:(a) by holding that Mr Taylor was not Totally Disabled in terms ofthe Policy;(b) by finding that Mr Taylor had Monthly Earned Income exceedingthe amount of his entitlements;(c) by finding that deliberate misrepresentations had been made byMr Taylor;(d) by holding that Asteron was entitled to cancel the Policy, and to a refundof all amounts paid under the Policy;(e) by rejecting Mr Taylor's change of position defence;(f) by awarding the full amount of interest claimed by Asteron; and(g) by awarding increased costs to Asteron and disbursements contrary tothe rules.[57] We address each of these issues below.Was Mr Taylor Totally Disabled?The issue[58] The Policy provided for benefits to be paid if Mr Taylor becameTotally Disabled. We set the definition out again for ease of reference:"TOTALLY DISABLED" means that you are unable to work in your usualoccupation for more than ten hours per week.[59] So the question was whether Mr Taylor had established that he was unable towork in his usual occupation as an insurance broker for more than 10 hours per week.[60] The Judge considered that Mr Taylor was able to, and did in fact, work formore than 10 hours per week, apart from the period immediately surrounding hisdiscectomy in April 2010. It was possible that there were other short periods of totaldisability, but Mr Taylor had not provided sufficiently clear evidence for those to beidentified.24Appellant's submissions[61] Mr Beck submitted that the Court conflated ability to work with the number ofhours spent at the business premises. Mr Taylor's evidence was that he was unable tofunction as previously, and much of the time he spent in the office was spent keepingup-to-date with industry developments and maintaining an involvement withthe business, which fell short of income-generating work.[62] Mr Beck emphasised that on the Judge's own reasoning there was an initialperiod where Mr Taylor was not able to work. That was corroborated by one of hisformer employees, Ms Tricker. There was accordingly a proper basis for Mr Taylor'sclaim, at least for this initial period.[63] For the period from July 2010 onwards, Mr Beck submitted, the Judge shouldhave found that Mr Taylor was unable to work having regard to his own evidence,a letter dated 30 October 2016 from his general practitioner, Dr Neylon, that was24 High Court judgment, above n 1, at [46].included in the agreed bundle at trial, and the evidence of Mr Rewcastle, an accountantwho had worked closely with Mr Taylor over a number of years. The Judge had beenoverly influenced by evidence of former employees about Mr Taylor's presence at theoffice, without considering what was entailed in the concept of "work", and withoutgiving proper weight to the absence of evidence about what Mr Taylor was actuallydoing while he was in the office.Analysis[64] We consider that the evidence from Mr Taylor's former employees, supportedby extensive documentary evidence of Mr Taylor's involvement in the business, wascompelling. We do not accept the narrow approach to the concept of "work"contended for by Mr Beck. Management activities undertaken by the principal ofan insurance broking business form an integral part of that individual's work activities.Similarly, the suggestion that liaising with staff and providing direction to staff inrelation to writing new business, renewals and claims handling does not amount towork is difficult to reconcile with the ordinary meaning of the term, or businesscommon sense.[65] The general statements made by Mr Rewcastle about the effect of Mr Taylor'sillness on his ability to work shed no light on whether he was unable to work for morethan 10 hours per week. It appears to be common ground that before Mr Taylorbecame unwell he worked long hours, and his illness resulted in a reduction of thosehours. But the evidence that he regularly worked more than 10 hours per week formost of the relevant period, apart from a short period immediately surrounding hisdiscectomy in April 2010, was quite clear.[66] We agree with the Judge that the letter from Dr Neylon in relation toMr Taylor's condition was not admissible as evidence of the truth of its contents.The inclusion of the letter in the agreed bundle for the trial, without objection, meantthat r 9.5(1) of the High Court Rules applied:9.5 Consequences of incorporating document in common bundle(1) Each document contained in the common bundle is, unless the courtotherwise directs, to be considered—(a) to be admissible; and(b) to be accurately described in the common bundle index; and(c) to be what it appears to be; and(d) to have been signed by any apparent signatory; and(e) to have been sent by any apparent author and to have beenreceived by any apparent addressee; and(f) to have been produced by the party indicated in the commonbundle index.(4) A document in the common bundle is automatically received intoevidence (subject to the resolution of any objection to admissibility)when a witness refers to it in evidence or when counsel refers to it insubmissions (made otherwise than in a closing address).[67] This rule must be read in conjunction with s 132 of the Evidence Act, whichprovides:132 Documents required to be discovered or included in commonbundle(1) This section applies only to a civil proceeding.(2) A document in a common bundle is received in evidence whenthe relevant conditions set out in rules of court have been compliedwith.(3) A document required by rules of court to be included in a party'saffidavit or list made for the purposes of discovery but which has notbeen so included, may be produced in evidence at the hearing onlywith—(a) the consent of the other party; or(b) the leave of the Judge.(4) Each document contained in the common bundle is subject topresumptions as to nature and origin that—(a) are specified in rules of court; and(b) are rebuttable in circumstances and in the manner set out inthose rules.[68] The letter from Dr Neylon was referred to by Mr Beck in opening. It wastherefore received in evidence, and became subject to the presumptions as to its natureand origin specified in r 9.5. It was admissible documentary evidence. But Mr Beck'ssubmission fails to distinguish between the admissibility of the document as evidencethat such a document was sent by Dr Neylon to Mr Taylor, and admissibility ofthe document as evidence of the truth of its contents. Rule 9.5(1)(a) read together withs 132 of the Evidence Act resulted in the document being received in evidence, andbenefiting from the presumptions set out in r 9.5(1)(b) to (f). But the mere fact thatthe document has been received in evidence does not mean that it is received asevidence of the truth of its contents. That is a different proposition altogether.The document would be received as evidence of the truth of its contents only if itqualified as admissible hearsay evidence under s 18 of the Evidence Act, whichprovides:18 General admissibility of hearsay(1) A hearsay statement is admissible in any proceeding if—(a) the circumstances relating to the statement provide reasonableassurance that the statement is reliable; and(b) either—(i) the maker of the statement is unavailable as a witness;or(ii) the Judge considers that undue expense or delaywould be caused if the maker of the statement wererequired to be a witness.[69] Mr Beck did not suggest that Dr Neylon was unavailable as a witness. Nor didhe identify any basis on which requiring her to be a witness would cause undueexpense or delay. Rather, if Dr Neylon's observation that Mr Taylor was unable towork was relied on as evidence about this critical issue, it was essential that she becalled and that Asteron have an opportunity to cross-examine her.[70] Even if we had accepted Mr Beck's submission, and treated the letter fromDr Neylon as evidence of the truth of its contents, that would not have affected ourconclusion that the Judge was right to find that Mr Taylor was not Totally Disabled.Little weight could be placed on the opinion expressed by Dr Neylon without knowingwhat information she based her opinion on, and in particular, whether she was awareof the extent of the work that Mr Taylor was in fact undertaking. The evidence ofthe employees who worked with him, and the documentary evidence of hisinvolvement in every aspect of the business, together provide a much more reliablebasis for a finding on this issue.[71] There is more force in Mr Beck's submission that the Judge found that therewas in fact an initial period of total disability. The Judge accepted that there wasa period immediately surrounding Mr Taylor's discectomy when he was not able towork for more than 10 hours per week.25 The Judge went on to say that he was notprepared to find that the statements in the initial claim form in relation to the period23 December 2009 to July 2010 were false.26[72] Ms Meechan QC submitted that the Judge had not found that Mr Taylor wasTotally Disabled during the initial period. The discectomy appears to have beencarried out in early April 2010.27 Ms Tricker gave evidence that there was a period ofsix to eight weeks when Mr Taylor was recovering from that operation and she did notsee him in the office at all.28 There was no evidence that he was disabled before thatpoint in time, and business records showed he was actively involved in the brokingbusiness in early 2010.[73] The evidence in relation to the initial period is sparse, and somewhatunsatisfactory. It appears Mr Taylor was totally disabled for at least six to eight weeks.It also appears that for some of the initial period, he may not have beenTotally Disabled.[74] It seems to us that the critical point in relation to this initial period is that it isnot the subject of Mr Taylor's claim: that claim relates to the period from September2014 onwards. The question whether Mr Taylor was Totally Disabled in the initial25 At [46].26 At [76]–[77].27 At [42].28 At [41].period is relevant only to Asteron's counterclaim. It is relevant to that counterclaimin two ways.[75] First, it is relevant to Asteron's allegation that Mr Taylor made false statementsin his initial claim and in his progress reports. The Judge rejected Asteron'ssubmission that the initial proposal contained false statements that breachedMr Taylor's obligations. Asteron did not file a memorandum of intention to supportthe judgment on other grounds that challenged that finding. In those circumstances itwould be wrong for us to revisit it.[76] Second, whether Mr Taylor was Totally Disabled in this period could berelevant to a restitution claim in which Asteron sought recovery of payments made inthat period on the basis that the Policy test was not made out. We discuss Asteron'srestitution claim from [90] below. For present purposes, it is sufficient to note thatthe burden of making out that restitution claim falls on Asteron. In circumstanceswhere the evidence about this period is unclear and equivocal, we are not persuadedthat Mr Taylor was not Totally Disabled for all or most of that period.[77] We therefore proceed on the basis that Asteron has failed to establish thatMr Taylor was not Totally Disabled from December 2009 to 22 July 2010, but hasestablished that he was not Totally Disabled from 23 July 2010 onwards.Mr Taylor's monthly earned incomeThe issue[78] Clause 2.1 of the Policy, which was set out at [22] above, provided forthe amount of any monthly Total Disability Benefit to be reduced byMonthly Earned Income. The term "Monthly Earned Income" was defined to include,for a self-employed person, "monthly pre-tax earnings net of any business expensesnecessarily incurred in deriving those earnings".[79] Mr Beck took issue with the Judge's interpretation of the termMonthly Earned Income. He submitted that the concept relates to income producedby virtue of individual effort, not income derived passively by virtue of investment.The result of the interpretation adopted by the Judge was that the Policy taken out byMr Taylor "was a completely worthless document. Because the business establishedby [Mr Taylor] was successful and continued to generate income even after he wascompelled by illness to reduce his input, he was effectively paying premiums for nobenefit".[80] Mr Beck also submitted that the issue of Mr Taylor's Monthly Earned Incomewas not properly before the Court in the proceedings. Asteron did not plead by wayof affirmative defence that any benefit to which Mr Taylor may have been entitledshould have been reduced to take into account his earnings. Nor, as Mr Beck submittedin the course of oral argument, was this an issue pleaded in the context of Asteron'scounterclaim. The Judge should not have considered the issue and made findingsabout it.Analysis[81] We deal with the pleading point first. Mr Beck was right to say that Mr Taylor'searnings, and the implications of those for the level of benefit to which he was entitledunder the Policy, were not referred to in Asteron's pleading. That pleading was verysparse: the response to Mr Taylor's claim consisted mainly of denials, andthe counterclaim focussed exclusively on Mr Taylor's statements about the hours ofwork he was undertaking.[82] Mr Taylor's pleaded claim was equally sparse: it ran to just two pages includingthe request for relief. In that brief pleading Mr Taylor claimed arrears of monthlybenefits from September 2014 onwards, and interest on those arrears. In order toestablish an entitlement to arrears, he needed to establish the sum he was entitled toreceive under the Policy in each month. So the burden was on him to show that hewas Totally Disabled, and that he was entitled to receive a payment under the Policyin each relevant month. That in turn necessarily depended on the level of hisMonthly Earned Income, under the formula set out in cl 2.1 of the Policy. We considerthat the question of Monthly Earned Income was in issue as a result of Mr Taylor'sclaim to be paid a benefit from September 2014 onwards, and Asteron's denial of hisentitlement.[83] Neither party pleaded the issue as clearly and transparently as they ought tohave. But Mr Taylor's earnings were put in issue by his claim for continuing paymentsfor the period from September 2014 onwards. They were also relevant to his changeof position defence in respect of Asteron's counterclaim. There was no unfairness toMr Taylor in the Judge making findings on that topic. The reason that Asteron hadsuspended payments in 2014 was Mr Taylor's refusal to provide financial statementsand other financial information. Asteron sought that information in discovery. It wasinitially provided with the false and misleading financial statements referred to at [35]above. Asteron filed expert evidence pointing out inconsistencies and defects in thosefinancial statements. That eventually resulted in discovery of the correct financialstatements. It is inconceivable that in those circumstances Mr Taylor was not awarethat the extent of his earnings over the relevant period was an issue in the proceedings.Indeed Mr Taylor called expert evidence from Mr Graeme Lindsay, an experiencedlife insurance advisor, to support the argument that the abatement should relate solelyto income arising from Mr Taylor's own efforts. He would not have needed to callevidence on that topic if the level of his earnings had not been in issue inthe proceedings.[84] Mr Beck accepted in argument that if the Judge's interpretation of the Policywas correct, it followed from the correct financial statements ultimately discovered byMr Taylor that he had no entitlement under the Policy in the period covered by thosefinancial statements. Mr Beck did not seek to argue that on the Judge's interpretationthere were any factual matters concerning Mr Taylor's income that had not beenadequately investigated at trial.[85] We consider that it follows that there can be no unfair prejudice to Mr Taylorin the High Court, or this Court, determining the correct interpretation of the term"Monthly Earned Income" as it is used in the Policy. And if the Judge was right in hisinterpretation of the Policy, there can be no unfair prejudice in applying the provisionby reference to the correct financial statements ultimately discovered by Mr Taylor.[86] We can deal with the interpretation issue briefly. We consider that the Judge'sinterpretation of this term of the Policy was plainly right. It is consistent withthe ordinary meaning of the words used. It is consistent with the context in whichthe Policy was originally entered into, and in particular the use of the financialstatements for the business to establish the level of income that Mr Taylor was earningand was able to insure. It is also consistent with commercial common sense.The purpose of the Policy was to protect Mr Taylor from a reduction in his incomefrom his insurance broker business as a result of illness. When the Policy was initiallytaken out, there was every prospect that if he was unable to work his income wouldreduce below the insured level. It may well have been the case that as the businessgrew and became more profitable, the Policy became less suitable for Mr Taylor'sneeds. But that does not mean that its interpretation should be retrospectively revisitedto accommodate that change in circumstances, as Mr Beck was constrained to accept.[87] It follows that even if Mr Taylor was Totally Disabled or Partially Disabled, hewas not entitled to be paid benefits under the Policy in the period January 2010 toMarch 2015 inclusive.[88] There was no evidence about Mr Taylor's Monthly Earned Income fromApril 2015 until April 2016 when (as we explain below) the Policy was cancelled.This period is relevant for the purposes of Mr Taylor's claim. The burden was on himto establish that he was entitled to a benefit during this period. His failure to produceany information about his income during that period means that he has failed to makeout his claim. And in any event, as the Judge held, Mr Taylor failed to establish thathe was Totally Disabled in this period.29[89] These findings are sufficient to dispose of Mr Taylor's claim for continuingpayments under the Policy from September 2014 onwards. We therefore turn tothe issues raised by Asteron's counterclaim.Counterclaim — the legal framework[90] The parties' written submissions dealt only briefly with the source and contentof the obligations of an insured when making claims under a policy. Both partiesaccepted that the Judge was right to approach the issue by reference to the provisionsof the CCLA in relation to breach and cancellation. In the course of oral argument we29 At [61].explored with counsel in more detail the source of the insured's obligations,the content of those obligations, and the consequences of a breach of those obligations.After the hearing we also invited the parties to provide further written submissions onthese issues.The insured's obligations in relation to claims[91] Many insurance policies contain express terms that govern the obligations ofan insured when making claims, and the consequences of a breach of those obligations.So for example the policy considered by the High Court in Blanshard v NationalMutual Life Association of Australasia Ltd provided that the insurer would avoidthe policy in the event of fraudulent misrepresentation or material non-disclosure bythe insured, and would be entitled to cancel the policy in the event of a fraudulentclaim under it.30[92] But in this case the Policy was silent on those matters.[93] The claim forms signed by Mr Taylor did refer to the need to provide accurateinformation, and to the consequences of failing to do so. The initial claim formincluded the following acknowledgement:I hereby declare that the information in this Claim Form is true, correct andcomplete. I understand and agree that if I make any false or fraudulentstatements or fail to advise Asteron Life Limited New Zealand of any relevantinformation regarding my claim, Asteron Life Limited New Zealand mayrefuse to pay and cancel my claim. I understand that I can be prosecuted ifI make any fraudulent statements.[94] Asteron's claim was pleaded on the basis that an insured owes a duty of utmostgood faith to an insurer in connection with making claims. Asteron's submissionsproceeded on the basis that this requirement applies in relation to every insurancepolicy. Asteron did not rely on the acknowledgements in the claim forms as a basisfor this obligation. Ms Meechan submitted that in order to show a breach of thisobligation, Asteron needed to prove that Mr Taylor deliberately misled Asteron.30 Blanshard v National Mutual Life Association of Australasia Ltd (2004) 13 ANZ Insurance Cases61-621 at [50].That is, Asteron needed to establish dishonesty in connection with claims made byMr Taylor.[95] Mr Beck submitted that Asteron had failed to properly plead a claim based onbreach of contract and cancellation under the CCLA. Putting that pleading point toone side, Mr Beck was anxious to persuade us that there was no requirement forAsteron to establish dishonesty in order to be entitled to cancel an insurance contract.If the contract required Mr Taylor to act in the utmost good faith in connection withclaims, he said, then conduct short of dishonesty could breach that obligation. In hiswritten submissions following the hearing Mr Beck submitted that when makinga claim, the insured can be expected to disclose to the insurer everything the insuredknows that is relevant to the claim in some material respect. Failure to do so wouldbe a breach of contract that would entitle the insurer to claim damages.[96] The parties' positions on the obligations of an insured in connection withclaims were the reverse of what one might have expected, with Mr Beck contendingfor a much less demanding threshold for liability than Ms Meechan. The explanationfor this unusual reversal of positions is that Mr Beck was seeking to persuade us thatdishonesty was not in issue in these proceedings, and it was therefore wrong forthe Judge to make a finding that Mr Taylor had been dishonest. Mr Beck submittedthat there was no need to make any findings about dishonesty in order to determineAsteron's counterclaim; Asteron had not pleaded dishonesty; and Mr Taylor was notcross-examined about whether the statements in his initial claim and progress reportswere made dishonestly. We return to these arguments about the Judge's findings at[121]–[129] below.[97] In order to determine the consequences of a breach of the insured's obligationsin relation to claims, we also need to consider the nature and source of thoseobligations. If they are implied terms, then the insurer's ability to cancel, andthe consequences of cancellation, will be governed by the CCLA. If they arefreestanding common law or equitable obligations, then the position would be morecomplex.[98] It is well established that an insured must act honestly in connection withthe making of a claim. Thus for example in Blanshard, Harrison J said:3153. A contract of insurance obliges both parties to observe the duty ofutmost good faith throughout their relationship. This principle applies mostprominently in two distinct situations — formation and renewal of therelationship, and submission of claims for indemnity. An insurer alleging badfaith by an insured in the latter circumstance must prove dishonesty.[99] In the recent United Kingdom Supreme Court decision in Versloot DredgingBV v HDI Gerling Industrie Versicherung AG (The DC Merwestone),Lord Sumption SCJ put it thus:32[1] At common law, if an insured makes a fraudulent claim on his insurer,the latter is not liable to pay the claim.[100] Lord Sumption SCJ referred to this principle as the "fraudulent claims rule".We adopt that terminology. The content of this rule is reasonably well settled.But there is considerable uncertainty about the nature and source of the insured'sobligation, in the absence of any express term in the policy. Is there an implied termto this effect? If so, is that implied term an essential term for the purposes of s 37 ofthe CCLA? Alternatively, is the fraudulent claims rule a freestanding common law orequitable rule? If so, what are the consequences of a breach of that rule — inparticular, is the policy voidable prospectively or retrospectively? Or is this rule oneaspect of a broader common law or equitable principle that the parties to insurancecontracts owe each other a duty of utmost good faith? And, if so, what arethe consequences of a breach of that broader duty?[101] The English cases also discuss a possible statutory source for the fraudulentclaims rule in the context of contracts of marine insurance: s 17 ofthe Marine Insurance Act 1906 (UK), which expressly provides that "[a] contract ofmarine insurance is a contract based upon the utmost good faith". There is noNew Zealand statutory equivalent, so we need not consider that source of the rule.3331 Blanshard, above n 30.32 Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (The DC Merwestone)[2016] UKSC 45, [2017] AC 1.33 For the history of this omission from the New Zealand Act, see Neil Campbell "The Scope of anInsurer's Post-Contractual Duty of Good Faith" (2016) 27 ILJ 185 at 187 and n 8.But we do need to consider whether there is a co-extensive common law or equitableprinciple that forms part of New Zealand law.[102] In Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea)Lord Hobhouse addressed the relevance of general principles of contract law tothe fraudulent claims rule.34 He drew a distinction between the operation ofthe principle of utmost good faith in relation to pre-contractual dealings — a rulewhich logically cannot depend on the terms of a yet-to-be-formed contract — andthe operation of that principle in relation to dealings between the parties afterformation of a valid contract, where the source of the parties' obligations isthe contract, and the express and implied terms contained in that contract.He characterised the fraudulent claims rule, which applies after a valid contract ofinsurance has been formed, as a term implied by law that can be modified or extendedby the express terms of the contract:50 Having a contractual obligation of good faith in the performance ofthe contract presents no conceptual difficulty in itself. Such an obligation canarise from an implied or inferred contractual term. It is commonly the subjectof an express term in certain types of contract such as partnership contracts.Once parties are in a contractual relationship, the source of their obligationsthe one to the other is the contract (although the contract is not necessarilyexclusive and the relationship which comes into existence may of itself giverise to other liabilities, for example liabilities in tort). The primary remedy forbreach of contract is damages. But the consequences of breach of contract arenot confined to this. The contractual significance of the breach may go further.It may also amount to a breach of a contractual condition which will excuseor suspend the other party's obligation to continue to perform the contract.It may be a repudiatory breach, or evidence a renunciation, which entitles theother party to terminate the contract and sue for damages. However any suchrelease only applies prospectively and does not affect already accrued rights:Colonial Bank v European Grain and Shipping Ltd [1989] AC 1056.Ordinarily, the right to the indemnity accrues as soon as the loss has beensuffered: Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65.51 The right to avoid referred to in section 17 is different. It appliesretrospectively. It enables the aggrieved party to rescind the contract ab initio.Thus he totally nullifies the contract. Everything done under the contract isliable to be undone. If any adjustment of the parties' financial positions is totake place, it is done under the law of restitution not under the law of contract.This is appropriate where the cause, the want of good faith, has preceded andbeen material to the making of the contract. But, where the want of good faithfirst occurs later, it becomes anomalous and disproportionate that it should beso categorised and entitle the aggrieved party to such an outcome. But this34 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] UKHL 1, [2003]1 AC 469.will be the effect of accepting the defendants' argument. The result iseffectively penal. Where a fully enforceable contract has been entered intoinsuring the assured, say, for a period of a year, the premium has been paid,a claim for a loss covered by the insurance has arisen and been paid, but later,towards the end of the period, the assured fails in some respect fully todischarge his duty of complete good faith, the insurer is able not only to treathimself as discharged from further liability but can also undo all that hasperfectly properly gone before. This cannot be reconciled with principle.No principle of this breadth is supported by any authority whether before orafter the Act. It would be possible to draft a contractual term which wouldhave such an effect but it would be an improbable term for the parties to agreeto and difficult if not impossible to justify as an implied term. The failure maywell be wholly immaterial to anything that has gone before or will happensubsequently.52 A coherent scheme can be achieved by distinguishing a lack of goodfaith which is material to the making of the contract itself (or some variationof it) and a lack of good faith during the performance of the contract whichmay prejudice the other party or cause him loss or destroy the continuingcontractual relationship. The former derives from requirements of the lawwhich pre-exist the contract and are not created by it although they onlybecome material because a contract has been entered into. The remedy isthe right to elect to avoid the contract. The latter can derive from express orimplied terms of the contract; it would be a contractual obligation arising fromthe contract and the remedies are the contractual remedies provided by the lawof contract. This is no doubt why judges have on a number of occasions beenled to attribute the post-contract application of the principle of good faith toan implied term.Fraudulent Claims:61 This question arises upon policies which up to the time of the makingof the claim are to be assumed to be valid and enforceable. No right to avoidthe contract had arisen. On ordinary contractual principles it would beexpected that any question as to what are the parties' rights in relation toanything which has occurred since the contract was made would be answeredby construing the contract in accordance with its terms, both express andimplied by law. Indeed, it is commonplace for insurance contracts to includea clause making express provision for when a fraudulent claim has been made.But it is also possible for principles drawn from the general law to apply toan existing contract—on the better view, frustration is an example of this as isthe principle that a party shall not be allowed to take advantage of his ownunlawful act. It is such a principle upon which the defendants rely in thepresent case. As I have previously stated there are contractual remedies forbreach of contract and repudiation which act prospectively and upon whichthe defendants do not rely. The potential is also there for the parties, if theyso choose, to provide by their contract for remedies or consequences whichwould act retrospectively. All this shows that the courts should be cautiousbefore extending to contractual relations principles of law which the partiescould themselves have incorporated into their contract if they had so chosen.The courts should likewise be prepared to examine the application of any suchprinciple to the particular class of situation to see to what extent its applicationwould reflect principles of public policy or the over-riding needs of justice.Where the application of the proposed principle would simply servethe interests of one party and do so in a disproportionate fashion, it is right toquestion whether the principle has been correctly formulated or is beingcorrectly applied and it is right to question whether the codifying statute fromwhich the right contended for is said to be drawn is being correctly construed.62 Where an insured is found to have made a fraudulent claim uponthe insurers, the insurer is obviously not liable for the fraudulent claim.But often there will have been a lesser claim which could properly have beenmade and which the insured, when found out, seeks to recover. The law is thatthe insured who has made a fraudulent claim may not recover the claim whichcould have been honestly made. The principle is well established and hascertainly existed since the early 19th century: Halsbury's Laws of England,4th ed reissue, vol 25 (1994), p 284, para 492, Welford and Otter-Barry,Fire Insurance, 4th ed (1948) p 289 et seq. This result is not dependant uponthe inclusion in the contract of a term having that effect or the type ofinsurance; it is the consequence of a rule of law. Just as the law will not allowan insured to commit a crime and then use it as a basis for recoveringan indemnity (Beresford v Royal Insurance Co Ltd [1937] 2 KB 197), so itwill not allow an insured who has made a fraudulent claim to recover.The logic is simple. The fraudulent insured must not be allowed to think: ifthe fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.[103] In Versloot Dredging Lord Sumption SCJ (with whom Lord Clarke, LordHughes and Lord Toulson SCJJ agreed) traced the evolution of the fraudulent claimsrule, and endorsed the view expressed by Lord Hobhouse in The Star Sea that aftera contract of insurance has been entered into, the content of the duty of good faith andthe consequences of its breach can be accommodated within the general principles ofthe law of contract. On that approach, the fraudulent claims rule can be seen as a termimplied or inferred by law, and the consequences of a fraudulent claim are determinedby the principles that govern breaches of contract:357 The common law rule relating to fraudulent claims appears tooriginate in the middle of the 19th century. In Britton v Royal InsuranceCo (1866) 4 F & F 905, which is generally regarded as the leading case, therewas an express clause, but Willes J in his summing up to the jury stated the lawaltogether generally, at pp 908–909:"A fire insurance, he said, is a contract of indemnity; that is, it isa contract to indemnify the assured against the consequences of a fire,provided it is not wilful. Of course, if the assured set fire to his house,he could not recover. That is clear. But it is not less clear that, evensupposing it were not wilful, yet as it is a contract of indemnity only,that is, a contract to recoup the insured the value of the propertydestroyed by fire, if the claim is fraudulent, it is defeated altogether.That is, suppose the insured made a claim for twice the amountinsured and lost, thus seeking to put the office off its guard, and in35 Versloot Dredging, above n 32.the result to recover more than he is entitled to, that would be a wilfulfraud, and the consequence is that he could not recover anything.This is a defence quite different from that of wilful arson. It givesthe go-bye to the origin of the fire, and it amounts to this—thatthe assured took advantage of the fire to make a fraudulent claim.The law upon such a case is in accordance with justice, and also withsound policy. The law is, that a person who has made sucha fraudulent claim could not be permitted to recover at all.The contract of insurance is one of perfect good faith on both sides,and it is most important that such good faith should be maintained.It is the common practice to insert in fire-policies conditions that theyshall be void in the event of a fraudulent claim; and there was sucha condition in the present case. Such a condition is only in accordancewith legal principle and sound policy."This approach was not initially accepted in Scotland, where the Court ofSession held that the genuine part of a fraudulently initiated claim wasrecoverable: Reid & Co Ltd v Employers' Accident and Livestock InsuranceCo Ltd (1899) 1 F 1031. But in England the courts consistently appliedWilles J's test to avoid the entirety of an exaggerated claim. That approachwas endorsed by the House of Lords in Manifest Shipping Co Ltd vUni-Polaris Insurance Co Ltd (The Star Sea) [2003] 1 AC 469.8 It was settled from an early stage of the history of English insurancelaw that the duty of utmost good faith applied not only in the making ofthe contract but in the course of its performance. The principle was givenstatutory force by section 17 of the Marine Insurance Act. In Britton's case,Willes J regarded the fraudulent claims rule as a manifestation of the duty ofutmost good faith, a view adopted by Christopher Clarke LJ, deliveringthe leading judgment in the Court of Appeal in the present case: paras 76–77.The rule is peculiar to contracts of insurance, and there can be little doubt thathistorically it is because they are contracts of utmost good faith that they havethis unique characteristic. But I am inclined to agree with the view expressedby Lord Hobhouse of Woodborough in The Star Sea (paras 50, 61–62) thatonce the contract is made, the content of the duty of good faith andthe consequences of its breach must be accommodated within the generalprinciples of the law of contract. On that view of the matter, the fraudulentclaims rule must be regarded as a term implied or inferred by law, or at anyrate an incident of the contract. The correct categorisation matters onlybecause if it is a manifestation of the duty of utmost good faith, then the effectof section 17 of the Marine Insurance Act 1906 is that the whole contract isvoidable ab initio upon a breach, and not just the fraudulent claim. If, onthe other hand, one adheres to the contractual analysis, the right to avoidthe contract for breach of the duty must depend on the principles governingthe repudiation of contracts, and avoidance would operate prospectively only.The choice is not, however, before us on this appeal because the insurers donot seek to avoid the contract. They seek only to avoid the claim for thisparticular casualty.9 What matters for present purposes is the rationale of the rule, on whichthere is a broad consensus in the authorities. It is the deterrence of fraud.As Lord Hobhouse observed in The Star Sea at para 62, "The logic is simple.The fraudulent insured must not be allowed to think: if the fraud is successful,then I will gain; if it is unsuccessful, I will lose nothing."Cf Galloway v Guardian Royal Exchange (UK) Ltd [1999] Lloyd's Rep IR209, 214 (Millett LJ); Direct Line Insurance plc v Khan [2002] Lloyd's RepIR 364, para 38; Agapitos v Agnew [2003] QB 556, para 14 (Mance LJ);Axa General Insurance Ltd v Gottlieb [2005] 1 All ER (Comm) 445 (CA),paras 28 and 31. The courts have explained the lack of a similar rule in otherareas of the law of contract by pointing to the asymmetrical positions ofthe parties to an insurance contract, the insurer being vulnerable on account ofhis dependence on the insured for information both at the formation ofthe contract and in the processing of claims: see Pan Atlantic Insurance CoLtd v Pine Top Insurance Co Ltd [1995] 1 AC 501, 542B (Lord Mustill);Orakpo v Barclays Insurance Services [1995] LRLR 443, 451 (Hoffmann LJ),452 (Sir Roger Parker).10 Fraudulent insurance claims are a serious problem, the cost of whichultimately falls on the general body of policy-holders in the form of increasedpremiums. But it was submitted to us that a forfeiture rule was not the answerto that problem. There was, it was said, little empirical evidence thatthe common law rule was an effective deterrent to fraud, and no reason tothink that the problem was peculiar to claims on insurers as opposed to, say,claims in tort for personal injuries, the cost of which also falls ultimately oninsurers and policy-holders without there being any equivalent common lawrule. Informational asymmetry is not a peculiarity of insurance, and in modernconditions may not even be as true of insurance as it once was. These pointshave some force. But I doubt whether they are relevant. Courts are rarely ina position to assess empirically the wider behavioural consequences of legalrules. The formation of legal policy in this as in other areas depends mainlyon the vindication of collective moral values and on judicial instincts aboutthe motivation of rational beings, not on the scientific anthropology of fraudor underwriting. As applied to dishonestly exaggerated claims, the fraudulentclaims rule is well established and, as I have said, will shortly becomestatutory.[104] Lord Hughes SCJ also traced the origins of the fraudulent claims rule, agreeingwith Lord Sumption SCJ about its rationale but describing it as a rule of common lawrather than as an implied term in the insurance contract:54 The law has for centuries recognised that special rules need to applyto insurance contracts. At the stage when a policy is being taken out,the potential insured will typically know a great deal more about hiscircumstances, and thus about the risk, than can the insurer to whom he isapplying. The response of the common law to this truth was to developthe rule that a contract for insurance must be conducted on both sides in theutmost good faith. In particular, when the contract is in negotiation the generalcommon law rule was that the applicant must volunteer to the insurer, whetherhe is asked or not, anything which he knows or ought to know and whicha prudent insurer would regard as relevant to the assessment of the risk.The consequence of breach, at common law, was that the insurer is entitled toavoid the policy altogether. When the law of insurance as it applied to marinecontracts was codified by the Marine Insurance Act 1906, this rule of utmostgood faith was repeated in section 17, which read: "A contract of marineinsurance is a contract based upon the utmost good faith, and, if the utmostgood faith be not observed by either party, the contract may be avoided bythe other party." This provision was declaratory of the common law relatingto insurance generally. As will be seen, this common law/statutory rule hasrecently been modified by statute, differentially for consumer insurance andnon-consumer policies, but exacting duties of disclosure are still imposed onthe applicant for insurance at the pre-contract stage. Otherwise, no doubt,the consequence would either be difficulty obtaining insurance or, more likely,demands for higher premiums.55 At the later stage when a claim is made, the policyholder will alsotypically know a good deal more about the facts which give rise to the claimthan the insurers possibly can, whether the claim arises out of a motoraccident, a burglary, fire damage to a factory or warehouse, the loss of luggageon holiday or the ingress of seawater into a ship. Insured loss is generallyadventitious. It may occur anywhere in the world and with or withoutwitnesses. Only sometimes will thorough investigation of the circumstancesof the claimed loss be a realistic option for insurers. Moreover, it is very muchin the interest of policyholders generally that when a claim arises, it should beaccepted promptly by the insurers, payment should be made, and business orprivate life should be allowed to resume with the loss repaired. Typically,insurers market their policies in part by advertising what they assert to be theirprompt and uncomplicated response to claims. If such is to be the response toclaims, insurers must take the claiming insured to a considerable extent ontrust. Furthermore, if claims have to be investigated in detail and routinelyverified by insurers, the cost of the systems necessary to do this will fall onpolicyholders generally through increased premiums, and good claims will bedelayed alongside the bad. The response of the common law to these truthswas the development of the fraudulent claims rule. It is a rule of law, imposedby the courts whether or not the policy contains a clause to the same effect,although many do and more used to do in the early days of insurance whenthe rule was developing. It seems more realistic to acknowledge it as havingachieved the status of a rule of common law, grounded in sound policy, ratherthan depending on an implied term in the contract. Apart from any otherreason, it seems far from clear that in every case such an implied term wouldmeet the tests of obviousness or business necessity. To anticipate, it will beseen that the recent legislation in relation to consumer and non-consumerinsurance preserves the fraudulent claims rule, but without resolvingthe question raised in the present case about its extent.64 It seems likely that the fraudulent claims rule developed as a matterof history from the general rule that the parties to a contract of insurance oweeach other the duty to act with the utmost good faith. In the present case, inthe Court of Appeal, Christopher Clarke LJ accepted this as the juridical basisfor the fraudulent claims rule: see para 77.65 In the past it has from time to time been assumed, in cases where anydifference between the two rules did not fall for examination, thatthe fraudulent claims rule was simply a manifestation of the rule of good faith.That assumption was made in passing in the classic direction to the jury ofWilles J in Britton v Royal Insurance Co (1866) 4 F & F 905, quoted byLord Sumption JSC at para 7 above, doubtless for the very good reason thatthe judge was directing the jury as to the law to be applied rather thanembarking on a general lecture upon legal theory. A similar assumption thenfigured in the judgments in both Orapko v Barclays Insurance Services [1995]LRLR 443 and Galloway v Guardian Royal Exchange (UK) Ltd [1999]Lloyd's Rep IR 209. But in none of those cases did any question of differencebetween the two rules arise. In each of the three there was fraudulentexaggeration of the claim, and indeed in the last two cases also non-disclosurepre-contract. In fact, there are significant differences between the two rules.66 If it were the case that the pre-contract duty of good faith continuesunaltered post-contract, that would no doubt support the contention thatthe fraudulent claims rule embraces collateral lies deployed in support ofa legally sound claim. The collateral lie would be a breach of good faith and,as Lord Sumption JSC says at para 8, the consequence of an unaltered duty ofgood faith would be that the collateral lie would entitle the insurer to avoidthe whole policy, and not simply for the future but ab initio. If that were so,the claim would fall with the policy.67 It has, however, been clear for many years, and is now indisputablefollowing Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd(The Star Sea) [2003] 1 AC 469, that although some duty of good faithcontinues post contract, it differs significantly from the pre-contract rule bothas to the obligation which it imposes and as to the remedy for breach. There is,for example, no continuing duty on the insured to disclose information whichcomes to the actual or constructive knowledge of the insured after the coverwas issued: see Cory v Patton (1872) LR 7 QB 304, Lishman v NorthernMaritime Insurance Co (1875) LR 10 CP 179, Niger Co Ltd v GuardianAssurance Co Ltd (1922) 13 Ll LRep 75 and New Hampshire Insurance Cov MGN Ltd [1997] LRLR 24, all confirmed in The Star Sea. There is nooccasion in the present case to pursue the elusive matter of definitive analysisof the content of the post-contract duty of good faith, for it is enough that itplainly includes the fraudulent claims rule. Secondly, any duty of disclosurewhich may exist post-contract ends with the commencement of litigation,when the different rules of court take over; they include, significantly,the concept of legal privilege. Thirdly and for present purposes mostimportantly, as The Star Sea makes clear, the remedy for post-contract fraudin the making of the claim is loss of the claim, not avoidance of the wholepolicy.[105] The position that appears to have been reached in England is that the fraudulentclaims rule is best seen as a common law rule in its own right, though its origins lie inthe concept of good faith. Treating the fraudulent claims rule as a manifestation ofa wider duty of good faith invites confusion, as the standard required in the context ofinsurance claims — honesty — is significantly less demanding than the standard ofdisclosure required before entry into an insurance policy. But there is continuingdebate as to whether the fraudulent claims rule should be seen as an implied term ofthe insurance policy, as suggested by Lord Hobhouse in The Star Sea andLord Sumption SCJ in Versloot Dredging, or as a rule of common law that applies toinsurance policies, as suggested by Lord Hughes SCJ in Versloot Dredging.3636 See also Axa General Insurance Ltd v Gottlieb [2005] EWCA Civ 112, [2005] 1 All ER (Comm)[106] As the passages set out above confirm, it is well established that if the insuredacts fraudulently in making a claim, the whole of the fraudulent claim is disallowed.Suppose for example that an insured has cover for loss caused by theft.Certain valuable items are stolen. When the insured makes a claim for those items,the insured dishonestly inflates that claim by including additional items that were notstolen. In such a case, the insurer may decline to pay the whole of the claim.37[107] However the English courts have rejected the proposition that the making ofa fraudulent claim entitles the insurer to avoid the policy from its inception, withthe result that the insurer can recover payments made in respect of earlier properlymade claims.38[108] The fraudulent claims rule has not been considered in any detail inNew Zealand by this Court or the Supreme Court. It has been considered and appliedin a number of first instance New Zealand decisions. Those decisions consistentlyapply a standard of dishonesty in connection with the making of claims, not the moredemanding standard of disclosure that applies before an insurance policy is enteredinto.39 They tend to treat the rule as a manifestation of a wider principle of good faith,along the lines of the passage from Blanshard set out above at [98]. But in those casesnothing appears to have turned on the nature of the fraudulent claims rule, in particular,whether or not it can be seen as an implied term of the policy. None of those decisionsaddresses the implications of this analysis for s 40 of the CCLA or its precursor, s 7(1)of the Contractual Remedies Act.[109] We consider that, to paraphrase Lord Sumption SCJ in Versloot Dredging,the fraudulent claims rule can and should be accommodated within the general445 at [18]–[20].37 See Robert Merkin and Chris Nicoll (eds) Colinvaux's Law of Insurance in New Zealand (2nd ed,Thompson Reuters, Wellington, 2017) at [7.3.5].38 Axa General Insurance Ltd v Gottlieb, above n 36, at [22]; and The Star Sea, above n 34, at [51].39 See for example Sampson v Gold Star Insurance Co Ltd [1980] 2 NZLR 742 (SC);Action Scaffolding Ltd v AMP Fire & General Insurance Co (NZ) Ltd (1990) 6 ANZ InsuranceCases 60-970 (HC); UEB Packaging Ltd v QBE Insurance (International) Ltd[1996] 2 NZLR 467 (HC) at 479; Blanshard, above n 30; Vero Insurance NZ Ltd v Posa[2008] 3 NZLR 701 (HC); and Fussell & McNamara v Broadbase Christchurch Ltd (2011)16 ANZ Insurance Cases 61–913.principles of the law of contract.40 The rule should be seen as a term implied by lawin all contracts of insurance to the effect that:41(a) the insured must act honestly in connection with the making of a claim;and(b) if the insured fails to do so, and dishonestly makes a claim that is falsein some material respect, the whole of the fraudulent claim will bedisallowed.[110] That implied term is of course subject to the express terms of the insurancecontract, which may extend, modify or restrict the term that would otherwise beimplied.[111] An implied term to this effect is consistent with longstanding common lawprinciples. It gives effect to the important policy considerations referred to inThe Star Sea and Versloot Dredging.The insurer's right to cancel in response to a fraudulent claim[112] It follows from this approach that, as the Judge held in this case, an insurer'sentitlement to cancel an insurance policy is governed by the CCLA. Section 40provides that the CCLA is a code governing cancellation for breach. None ofthe exceptions set out in s 59 applies. We do not consider that there are any specialrules governing cancellation of insurance contracts that operate in parallel to theCCLA. The continuing existence of a separate insurance-specific regime is not40 Versloot Dredging, above n 32, at [8].41 Despite the doubts expressed by Lord Hughes SCJ in Versloot Dredging, this term would also inour view meet the orthodox test for implication of terms into a particular contract, including therequirements that it is necessary to give the contract business efficacy, and that it is so obviousthat it goes without saying: see Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finnand Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2017) at[6.4.4(a)]; and Ward Equipment Ltd v Preston [2017] NZCA 444, [2018] NZCCLR 15 at [93]–[94]. The alternative approach to implication of terms referred to in Ward Equipment at [46]–[47]would lead to the same result.reconcilable with s 40 of the CCLA. A parallel regime of that kind would add nothingbut complexity and confusion. The law in relation to express and implied terms, andthe provisions of the CCLA in relation to cancellation and its consequences, providea workable and appropriate framework for determining these issues.[113] It follows that the entitlement of an insurer to cancel an insurance policybecause of the conduct of the insured in connection with a claim turns on:(a) the terms of the policy — express or implied — governing the makingof claims;(b) whether the insured has breached a relevant term of the policy; and(c) whether that breach entitles the insurer to cancel the contract. That willbe the case if, and only if, the contract expressly provides for a right tocancel in the circumstances which have occurred, or the test forcancellation in s 37 of the CCLA is met.[114] Section 37 of the CCLA provides as follows:37 Party may cancel contract if induced to enter into it bymisrepresentation or if term is or will be breached(1) A party to a contract may cancel it if—(a) the party has been induced to enter into it bya misrepresentation, whether innocent or fraudulent, made byor on behalf of another party to the contract; or(b) a term in the contract is breached by another party tothe contract; or(c) it is clear that a term in the contract will be breached byanother party to the contract.(2) If subsection (1)(a), (b), or (c) applies, a party may exercise the rightto cancel the contract if, and only if,—(a) the parties have expressly or impliedly agreed that the truth ofthe representation or, as the case may require, the performanceof the term is essential to the cancelling party; or(b) the effect of the misrepresentation or breach of the contract is,or, in the case of an anticipated breach, will be,—(i) substantially to reduce the benefit of the contract tothe cancelling party; or(ii) substantially to increase the burden of the cancellingparty under the contract; or(iii) in relation to the cancelling party, to make the benefitor burden of the contract substantially different fromthat represented or contracted for.[115] In the absence of an express term providing for cancellation, the insurer willbe entitled to cancel if a term (the implied term set out above at [109], or an expressterm to similar effect) is breached and either that term is essential (s 37(2)(a)) orthe consequences of breach are substantial (s 37(2)(b)).[116] Where the term set out above is implied into a contract of insurance,we consider that it is implicit in that contract that performance of this implied term isessential to the insurer. An insurer would not be willing to contract with an insuredwho was not willing to promise to act honestly in connection with claims. It wouldbe obvious to both insurer and insured that no insurer would wish to continue toprovide cover to an insured who had made a dishonest claim.[117] It follows that if an insured makes a dishonest claim, the insurer is entitled todamages for any loss caused by that breach, and is entitled to cancel the contract unders 37(1)(b) and (2)(a) of the CCLA. Section 42(1) of the CCLA provides that (subjectof course to any express term to different effect) cancellation operates prospectively:42 Effect of cancellation(1) When a contract is cancelled, the following provisions apply:(a) to the extent that the contract remains unperformed at the timeof the cancellation, no party is obliged or entitled to performit further:(b) to the extent that the contract has been performed at the timeof the cancellation, no party is, by reason only ofthe cancellation, divested of any property transferred ormoney paid under the contract.[118] So where a fraudulent claim is made, and the insurer cancels the policy:(a) The policy is terminated with effect from the date of cancellation;(b) The insurer is not obliged to pay the fraudulent claim, by virtue ofthe implied term set out at [109] above; but(c) The cancellation does not affect other claims made under the policybefore the date of cancellation. If an earlier claim has been paid,cancellation does not affect the right of the insured to retain thatpayment. If the claim has not been paid, it must be settled in accordancewith the terms of the policy in the normal way.[119] We explored with counsel whether it might be possible to imply a morefar-reaching term that requires an insured to provide accurate and completeinformation to support a claim. We do not consider that a broader term of this kindcan be implied into all insurance contracts. That would go far beyondthe long-established common law fraudulent claims rule. It is neither necessary, norobvious.42 If an insurer wishes to contract on more stringent terms, they should do soexpressly in the interests of transparency: especially in the context of consumerinsurance products such as the income protection policy in this case. Our view thatthe appropriate implied term does not extend beyond requiring honesty is reinforcedby the Fair Insurance Code 2020 issued by the Insurance Council of New Zealand.That Code advises insureds that: "You should act honestly when making a claim".43It would be difficult for a New Zealand insurer to argue that a more onerous obligationshould be implied into all insurance contracts, in circumstances where their jointlyissued public-facing statement of an insured's obligations did not go that far.42 In particular, such a term is not necessary to enable an insurer to decline a claim based oninaccurate information. In most cases where an insured provides honest but incorrect informationin a claim, and that information is material to the insured's entitlement under the policy, the insurerwill be able to recover any overpayment in a restitution claim. A broader implied term, coupledwith a claim for breach of that term, is not necessary in order for the insurer to have a right ofrecovery in this scenario.43 Fair Insurance Code 2020 at 11.[120] Thus we proceed on the basis that Asteron was entitled to cancel the Policyunder the CCLA if, and only if, Mr Taylor breached the implied essential term thatthe insured must act honestly in connection with the making of a claim.Such a cancellation would operate prospectively. It would also enable relief to besought under s 43 of the CCLA.Was dishonesty in issue in these proceedings?[121] We return to Mr Beck's submission that Mr Taylor's honesty was not in issuein these proceedings, and the Judge should not have made findings on that point.Did Asteron's pleading allege dishonesty?[122] As noted above, Asteron pleaded that Mr Taylor owed Asteron a duty of utmostgood faith, and had breached that duty. This is the language used in Blanshard andother New Zealand insurance cases when applying the fraudulent claims rule.44The pleading needs to be read against the backdrop of this line of authorities. It wouldhave been obvious to an experienced lawyer advising Mr Taylor that this wasan allegation of dishonesty. It would have been preferable for the allegation ofdishonesty to be pleaded more explicitly, but we do not think there was any room fordoubt in practice.[123] Nor were Mr Taylor and Mr Beck under any misapprehension on this score.In his reply brief of evidence, filed in advance of the trial, Mr Taylor said:Asteron is claiming that I deliberately misled them regarding the work I wasdoing while on claim. I completely reject the insinuation that I have beendishonest in my dealings with Asteron. I provided the information requestedfrom me to the best of my recollection, and answered all the questions askedin follow-up phone calls.[124] And as the Judge recorded:45 in opening Mr Beck for the plaintiff advised that there was a very starkdifference in the positions of the parties, as Asteron was contending thatMr Taylor had acted fraudulently, and Mr Taylor contended that Asteron wasfailing in its duties in a highly inappropriate way.44 See [108] above and n 39.45 High Court judgment, above n 1, at [3].[125] We therefore proceed on the basis that Asteron's pleading was sufficient to putin issue the honesty of Mr Taylor's statements in the initial claim form and progressreports about the extent to which he was able to work. That was an issue that the Judgewas required to decide.Was the allegation of dishonesty adequately put to Mr Taylor?[126] It is also convenient to deal at this point with Mr Beck's submission thatthe issue of dishonesty was never properly put to Mr Taylor. Section 92 ofthe Evidence Act required this serious and legally significant allegation to be putsquarely to Mr Taylor, to give him an opportunity to answer it. Section 92 provides:92 Cross-examination duties(1) In any proceeding, a party must cross-examine a witness onsignificant matters that are relevant and in issue and that contradictthe evidence of the witness, if the witness could reasonably beexpected to be in a position to give admissible evidence on thosematters.(2) If a party fails to comply with this section, the Judge may—(a) grant permission for the witness to be recalled and questionedabout the contradictory evidence; or(b) admit the contradictory evidence on the basis that the weightto be given to it may be affected by the fact that the witness,who may have been able to explain the contradiction, was notquestioned about the evidence; or(c) exclude the contradictory evidence; or(d) make any other order that the Judge considers just.[127] Where a witness has not been given an adequate opportunity to providean explanation of their conduct, it is not appropriate to draw a conclusion ofdishonesty.46[128] Mr Taylor was cross-examined extensively about the inaccuracies in the initialclaim form and in his progress reports. Before that cross-examination took place, heknew that Asteron's case was that he had dishonestly failed to disclose the extent of46 Longhurst v Ministry of Social Development [2019] NZHC 1496 at [63]–[64]; and Blair v R[2012] NZCA 62 at [42].the work he was undertaking. He had every opportunity to provide explanations forthe omissions in the claim documents in his evidence in chief, in cross-examination,and (if Mr Beck thought that Mr Taylor was in a position to provide an explanation)in re-examination. It would have been preferable for Ms Meechan to squarely put toMr Taylor, in relation to each claim document, the proposition that he knew that hehad done work that was not disclosed, and knew that the claim form was false. But wedo not consider that there is any unfairness in the Judge's approach to the evidence, orin his findings that there was an irresistible inference that Mr Taylor knew thatthe statements he made that he had not done any work in most of the relevant periodssimply were not true.[129] The findings of dishonesty made by the Judge were a necessary step indetermining Asteron's counterclaim. Mr Taylor knew that Asteron was alleging thathe had acted dishonestly by failing to make full disclosure in the claim forms of workhe had done. He had a fair opportunity to respond to that allegation and provideexplanations for the omissions. It was open to the Judge to make findings ofdishonesty.Breach of Mr Taylor's obligation to act honestly in connection with claims[130] We have already concluded that the Judge was right to find that Mr Taylor wasworking substantially more than 10 hours per week from July 2010 onwards.He disclosed even fewer hours than this in the claim forms. They were plainly false.Given the extent and frequency of the work done by Mr Taylor, the inference that heknew the statements in the claim forms were false is irresistible.[131] Mr Beck did not attempt to persuade us that the claim forms were accurate.The primary explanation he suggested for the inaccuracies in the claim forms was thatMr Taylor was entitled to engage in limited activities and to spend up to 10 hoursper week in his usual occupation. Mr Taylor's view, according to Mr Beck, was thathe was working within those constraints.[132] The difficulty with this submission is that the claim forms did not ask fordisclosure of work done in excess of 10 hours per week. They sought disclosure of allwork done, so that Asteron could assess whether the 10-hour threshold forTotal Disability was exceeded. In many of the periods for which claim forms werefiled Mr Taylor failed to disclose that he had done any work, when plainly he had.In other periods he engaged in work well in excess of what was disclosed. Mr Taylor'sview about what he was entitled to do was simply irrelevant so far as his disclosureobligation was concerned.[133] Mr Beck also suggested to us that claims managers at Asteron were notconcerned about Mr Taylor's limited activities. But the lack of concern they expressedwas of course based on the incomplete and misleading information provided inthe claim forms. Mr Beck did not suggest that Mr Taylor had been given, and hadrelied on, indications from claims managers that certain types of work need not bedisclosed. There was no evidence to support any suggestion along those lines.Mr Beck expressly disclaimed any argument founded on an estoppel.[134] We consider that the Judge was entitled to find, as he did, that Mr Taylor acteddishonestly in connection with all the claim forms other than the initial claim form.It follows that Mr Taylor breached the implied essential term that he would acthonestly in connection with claims. This breach was pleaded and argued by Asteronin the language of duty of utmost good faith that is found in cases such as Blanshard.Those formulations amount to the same thing as a matter of substance, as we explainedabove.47[135] That breach entitled Asteron to claim damages. Because the term wasimpliedly essential, Asteron was also entitled to cancel the Policy under s 37 ofthe CCLA. Did Asteron do so?47 See [122] above.CancellationThe issue[136] Mr Beck submitted that Asteron had never validly cancelled the Policy.Section 41 of the CCLA generally requires a cancelling party to give notice of thatcancellation before it is effective. Section 41 provides:41 When cancellation may take effect(1) The cancellation of a contract by a party does not take effect—(a) before the time at which the cancellation is made known tothe other party; or(b) before the time at which the party cancelling the contractshows, by some clear means that is reasonable inthe circumstances, an intention to cancel the contract, if—(i) it is not reasonably practicable for the cancellingparty to communicate with the other party; or(ii) the other party cannot reasonably expect to receivenotice of the cancellation because of that other party'sconduct in relation to the contract.(2) The cancellation may be made known by words or by conductshowing an intention to cancel, or both. It is not necessary to use anyparticular form of words, so long as the intention to cancel is madeknown.[137] Asteron never wrote to Mr Taylor cancelling the Policy. The issue at trial waswhether Asteron had by some other means conveyed its intention to cancel.[138] The Judge considered that the statement in Mr Strong's brief of evidence,referred to at [47] above, could be interpreted as notice of cancellation. That, Mr Becksubmitted, cannot be right. Mr Strong accepted that his evidence was not given onbehalf of Asteron. So statements in his evidence could not be notice by Asteron.And in his evidence Mr Strong claimed that the Policy had been cancelled on 11 April2016: that is inconsistent with Mr Strong giving notice of cancellation in the brief filedin 2018. So, Mr Beck said, Asteron had failed to establish the requirements forcancellation under the CCLA, and its counterclaim ought to have been dismissed.Analysis[139] We consider that Asteron's pleading dated 11 April 2016 was sufficient noticeof cancellation for the purposes of s 41 of the CCLA. Section 41 requiresthe cancelling party to show an intention to cancel. It is not necessary to use anyparticular form of words, so long as the intention to cancel is made known.[140] In [17] of its pleading Asteron expressly said that it was entitled to cancelthe Policy. At [18] Asteron pleaded that it was not obliged to pay any further benefitsto Mr Taylor, and was entitled to recover the benefits paid to date. We read thispleading as a clear indication by Asteron that it regarded the contract as at an end.Thus Asteron's pleading was in our view an effective communication of cancellation.It is therefore unnecessary to consider whether the brief of evidence filed by Mr Strongwas capable of being treated as notice of cancellation by Asteron, though we see someforce in Mr Beck's criticisms of that proposition.[141] Hence the contract was validly cancelled in April 2016. Asteron had nocontinuing liability under the Policy from that point onwards. And, as the Judge said,it was entitled to damages and could seek relief under s 43 of the CCLA.What is Asteron entitled to recover?The issues[142] Mr Taylor submits that Asteron is not entitled to recover amounts paid inrespect of the initial period, as the Judge did not find that the initial claim formcontained false statements.[143] Mr Taylor also submits that the Judge erred in rejecting his change of positiondefence.Analysis[144] It follows from the findings the Judge made in relation to breach by Mr Taylorthat Asteron would be entitled to recover, as damages, the amounts that it paidMr Taylor as a result of his dishonest statements. On this basis Asteron could recoverall the amounts it paid other than the $51,835.64 paid in respect of the initial period.[145] Cancellation of a contract under the CCLA operates prospectively,not retrospectively, as explained above. So it does not follow from the fact ofcancellation that Asteron is entitled to recover any payments made before April 2016.[146] We do not consider that Mr Taylor's dishonesty in respect of subsequentperiods means that Asteron is entitled to recover amounts paid in respect of the initialperiod, whether as damages or under s 43. His dishonesty in respect of those laterperiods, and Asteron's cancellation in response to that dishonesty, do not impugn inany way the validity of the payments made in that earlier period. We agree withthe Judge that where an insured acts dishonestly in connection with a claim, the insureris entitled to refuse to pay the whole of that claim, including any component ofthe claim that could properly have been made. The implied term we have identifiedat [109] above provides for this consequence. But it does not follow that earlier claimsthat were properly made and properly paid can be unravelled. Our view that fraudulentclaims do not have that effect as a matter of New Zealand contract law is consistentwith the position reached by the English courts in relation to the consequences ofa fraudulent claim as a matter of common law: see [107] above.[147] It follows from the Judge's findings about Mr Taylor's earnings in 2010 thatMr Taylor was not in fact entitled to any benefit under the Policy during the initialperiod. The payments by Asteron were made under the influence of a mistake. In suchcircumstances an insurer will generally be able to recover the mistaken payments ina restitution claim, subject to the defences that normally apply to such a claim.However Asteron did not plead a claim for recovery of overpayments on the basis thatMr Taylor's earnings disqualified him from receiving benefits under the Policy.And as noted above, Asteron did not seek to uphold the Judge's award on that basis inthis Court by filing a memorandum of intention to support on other grounds.[148] Asteron says it only learned of the extent of Mr Taylor's earnings in late 2018,a few months before the trial, when the correct financial statements were finallydiscovered. Asteron could have sought leave to amend its pleading to add a restitutioncause of action, in the alternative to the cause of action based on the fraudulent claimsrule. The case for granting leave would have been compelling in circumstances wherelate discovery had been provided of a dramatically different set of financial statementsfor Mr Taylor's business. Ms Meechan suggested that seeking leave to amend wouldhave created a risk of the trial being adjourned. That is possible, though the case foran adjournment on this basis seems rather weak. Asteron might have faced potentiallimitation issues if it had sought to amend its counterclaim in late 2018 or early 2019to add a restitution claim in relation to payments made in 2010, unless it could arguethat the running of time was postponed under s 28 of the Limitation Act 1950. Be thatas it may, Asteron chose to refrain from seeking to amend its pleading, and proceededto trial. It cannot now complain that it is unable to pursue a claim that it chose not toseek to pursue.[149] We can deal briefly with Mr Taylor's change of position defence in relation tothe period from July 2010 onwards. We agree with the Judge that the basic ingredientof good faith was absent in respect of this period.48 Moreover the evidence to supportthe argument that Mr Taylor relied on the sums received from Asteron when makingdecisions about lifestyle expenditure during this period was wholly inadequate.Without evidence about Mr Taylor's overall level of income and expenditure it wasimpossible for Mr Taylor to establish the materiality of the sums received from Asteronto the spending choices he made. He was in receipt of a substantial income throughoutthe period, in addition to the sums received from Asteron. He did not establish thathis financial position was substantially different with the Asteron payments than itwould have been without the Asteron payments. Nor did he establish that his spendingchoices were likely to have been different in the latter scenario. The Judge was rightto find that the change of position defence was not made out.Application to adduce further evidence on appeal[150] For completeness, we address Mr Taylor's application for leave to adducean affidavit from his general practitioner, Dr Neylon. The affidavit attaches the letter48 Though not, as explained above, in respect of the period prior to July 2010. If Asteron had pleadeda restitution claim based on mistake in relation to Mr Taylor's income during this period, a morefocused change of position defence in respect of that period might have raised different issues that(absent such a claim) were not canvassed before the High Court or before this Court.from Dr Neylon dated 30 October 2016 referred to at [63] above and an updated reporton Mr Taylor's condition prepared in July 2019. The affidavit records that Dr Neylonhad a consultation with Mr Taylor on 21 February 2020. She says that his conditionhas not improved. He continues to suffer from chronic pain and is on a high dose ofmethadone. She does not expect any marked change in his condition in the foreseeablefuture.[151] Mr Beck described this evidence as updating evidence. He said that its purposewas "so that the Court can have current information regarding the status ofthe appellant's health". Mr Beck expressly disclaimed any suggestion that the purposeof adducing this evidence was to support the argument that Mr Taylor wasTotally Disabled in the period prior to the High Court judgment.[152] Asteron opposed admission of this evidence. Ms Meechan said that tothe extent that Dr Neylon addressed issues that were live before the High Courtthe evidence was not fresh: she could have been called to give that evidence at trial.And it would be seriously unfair for such evidence to be admitted on appeal, withoutany opportunity to cross-examine or to call evidence in response.[153] We agree with Ms Meechan that in so far as Dr Neylon's evidence relates toMr Taylor's medical condition and ability to work in the period up to April 2016,it should not be received on appeal. It is not fresh. There would be unfair prejudiceto Asteron if it were to be admitted at this stage. But as we noted above, Mr Beckdisclaimed any reliance on the evidence for that purpose.[154] We have concluded that the Policy was effectively cancelled in April 2016.So no question of continuing entitlement under the Policy arises. In so far asthe affidavit provides updating evidence to support a claim to benefits under the Policyafter April 2016, it is irrelevant as the Policy was no longer on foot. The issue ofwhether Mr Taylor was disabled after that date does not arise.[155] In these circumstances we decline leave to adduce the affidavit on appeal. It isnot relevant to any issue that we need to decide.Interest[156] We can deal briefly with the appeal in relation to the interest awarded toAsteron. Mr Beck accepts that s 87 of the Judicature Act applies to Asteron'scounterclaim. But he says that the Interest on Money Claims Act 2016 was designedto provide a more accurate way of compensating for the use of money, based onthe actual cost of money during the relevant period. It would be more just to usethe figure derived by applying the Interest on Money Claims Act. The differencebetween the figures derived using the two methodologies — $18,247.03 — indicates,he submitted, that the "blunt instrument" of Judicature Act interest results inovercompensation. There was no basis for the Judge's statement that interest atfive per cent did not involve overcompensation here. Mr Beck also suggested thatthe delays in resolving the case, which he attributed to Asteron's pursuit of third-partydiscovery, had led to a substantial increase in the interest awarded. Asteron'sresponsibility for that delay, he said, made it appropriate for interest to be reducedaccordingly.[157] Ms Meechan emphasised that it was common ground that s 87 ofthe Judicature Act applied in this case. There was no reason to adopt a differentapproach to interest. The time taken to prepare for trial was justifiable, and wasnecessitated by Mr Taylor's concealment of the work he did and the income he derivedduring the claims period. Asteron had not claimed the higher rate of interest(8.5 per cent per annum) that applied under the Judicature Act for part of the relevantperiod. The approach adopted by Asteron of claiming interest at five per centper annum for the entire period produced a fair result.[158] We agree with Ms Meechan that Mr Taylor has not established thatthe application of the Judicature Act methodology gives rise to any material unfairnessin this case. It is a blunt instrument. But it strikes a reasonably fair balance betweenthe parties in this case. In particular:(a) There was no unjustifiable delay in bringing this matter to trial thatwould justify reducing the period for which interest is awarded.Asteron was kept out of its money for the relevant period, andMr Taylor had the benefit of use of that money for that period, asa result of his dishonesty. Asteron is entitled to receive interest forthe whole of the period from the making of each dishonestly procuredpayment until the date of judgment.(b) Having regard to the concession already made by Asteron in relation tothe applicable interest rate, a more fine-grained inquiry into the rate ofinterest to be paid in this case is not justified.[159] Mr Beck also complained that no credit had been given for premiums thatMr Taylor continued to pay while he was receiving payments under the Policy, despiteprovision in the Policy for a "Waiver of Premium Benefit" under which he was entitledto a waiver or refund of premiums paid while on claim. This issue was not raised inthe pleadings. It appears that Mr Taylor continued to pay premiums while he wasreceiving a disability benefit under the Policy, and those premiums were then refundedto him together with the disability benefit payments. The schedule attached toAsteron's counterclaim refers to premium refund payments being made throughoutthe relevant period. If that was the position, then no credit would be due to Mr Taylor:premiums were payable by him as the Policy remained on foot; refunds were paidwhile he was on claim; and for the period in respect of which fraudulent claims weremade Asteron was entitled to recover all payments made under the Policy includingpremium refunds.[160] Mr Beck's submission that premiums continued to be paid for a period aftercancellation of the Policy in April 2016 was not supported by any evidence before us.[161] We are not satisfied that any premium payments were made by Mr Taylor inrespect of which a credit should have been provided when calculating interest.Costs issues[162] Mr Beck raised a number of issues about the costs award in the High Court.[163] First, he complained that the discovery exercise had been "enormous, andcompletely out of proportion to the amount at stake". He contended that Asteron had"run riot" with discovery in this case.[164] We consider that the Judge was well placed to assess the proportionality ofthe discovery exercise and associated costs in this case. Mr Beck has not identifiedany reason for us to take a view that differs from that of the Judge. We add that thenature of the claim made by Mr Taylor, and Asteron's defence and counterclaim, madea detailed examination of Mr Taylor's involvement in the day to day operation of hisbusiness inevitable. Discovery of the extensive documentation evidencing hisinvolvement in the business over an extended period enabled Asteron to demonstratethat Mr Taylor's claims were false, and that he had acted dishonestly.That documentation was important to the determination of the matters in issue below.The Judge's award of costs for discovery on a 2C basis in these circumstances is notsurprising.[165] Second, Mr Beck submitted that the Judge erred in awarding the full amountof disbursements claimed in respect of two of the expert witnesses: Mr Hussey, whogave expert accounting evidence, and Mr Roigard, a private investigator, who gaveevidence about telephone calls made to and from numbers associated with Mr Taylor.[166] For the reasons explained above, we do not accept Mr Beck's submission thatMr Taylor's income was not in issue. It was relevant to his claim, and to his changeof position defence to Asteron's counterclaim. The time required to investigate theseissues was significantly increased by Mr Taylor's initial provision of irrelevantfinancial statements for the Company, and of falsified financial statements for hisinsurance broking business. Mr Taylor cannot reasonably complain about meetingthe cost to Asteron of Mr Hussey's time spent ascertaining the correct position, againstthat backdrop.[167] Mr Roigard's evidence was described by the Judge as being "of only peripheralrelevance".49 But, the Judge said, the amount claimed was not high, it wasunsurprising that evidence was called about the frequency of Mr Taylor's telephone49 Interests/costs judgment, above n 2, at [15(b)].calls, and the disbursement was reasonably necessary for the conduct of theproceedings. We agree with the Judge that evidence about Mr Taylor's call activitywas relevant to the issue of his continuing involvement in the business. We are notpersuaded that the Judge erred in awarding this disbursement.[168] Third, Mr Beck says that the Judge erred in awarding Asteron the costs it paidIAG in connection with the third party discovery that Asteron sought from IAG. Otherinsurers from whom third party discovery was obtained had not incurred external legalfees. Ms Meechan responded that the third party discovery obtained from IAG wasmore extensive than the discovery obtained from other insurers. Other insurers hadused in-house lawyers to provide their more modest discovery. IAG had reasonablyused external lawyers, and Asteron had met the cost of their doing so.[169] We consider that the legal costs incurred by IAG and paid by Asteron wereproperly recoverable as a disbursement, unless they were shown to be so plainlyunnecessary or excessive that it was not reasonable for Asteron to have met them.Mr Beck's criticisms did not persuade us that that was the case.[170] Fourth, Mr Beck says that Asteron claimed a scheduling fee of $1,600 inrespect of an interlocutory application. However under the High Court FeesRegulations 2013 there is no scheduling fee for an interlocutory application. Asteronsays it paid the relevant fee to the Court, so should be able to recover it from Mr Taylor.[171] This issue was not addressed by the Judge. If Asteron did pay a fee that wasnot properly payable, it should be able to recover it from the High Court. It is possiblethat the fee was misdescribed in Asteron's costs schedule, and that the amount paidrelated to some other properly payable fee. But Asteron did not provide any furtherinformation about this item, and we cannot simply assume that a claimed payment isa justifiable disbursement on a basis other than that identified by the party claiming it.We therefore disallow this claimed disbursement.[172] Fifth, Mr Beck says that Asteron claimed, and was awarded, filing fees for itsoriginal statement of defence. Mr Beck submitted that r 7.77(8) of the High CourtRules provides that a party filing an amended pleading must bear all the costs ofthe original pleading. He says the Judge did not address this issue, and the claim isnot a legitimate one.[173] Rule 7.77(8) provides that a party filing an amended pleading must bearthe costs of the original pleading "unless the court otherwise orders". The ruleestablishes a default position which may be departed from where appropriate. In thiscase we consider that it was reasonable for Asteron to file an initial defence toMr Taylor's claim, and then (after investigating the issues in more depth) filean amended defence and a counterclaim seeking recovery of payments previouslymade. The High Court awarded costs for the original pleading, in effect applyingthe proviso to r 7.77(8). We consider that was an appropriate approach inthe circumstances of this case.[174] Sixth, Mr Beck objects to the inclusion in the costs award following trial ofcosts in respect of two interlocutory applications where the judicial officers dealingwith the application did not address the question of costs at the time the applicationwas heard and determined. Mr Beck is right to say that costs should be fixed atthe time an interlocutory application is determined, in the absence of special reasonsto the contrary.50 But in circumstances where the judicial officers who determinedthe applications did not make an award of costs, it was open to the trial Judge to doso.51 One of the practical rationales for the rule requiring costs to be dealt with atthe time of the interlocutory application was well illustrated by the argument beforeus on this issue: counsel had diametrically opposed views about the relative successtheir clients had enjoyed in respect of these applications. It appears fromthe judgments delivered in relation to the two applications that it was reasonable forAsteron to make the applications, and Asteron enjoyed a substantial measure ofsuccess, though not complete or unqualified success.52 In those circumstancesMr Beck has not persuaded us that the Judge was wrong to award costs to Asteron inrespect of these applications.50 High Court Rules 2016, r 14.8.51 Hgh Court Rules, r 14.9.52 Taylor v Asteron Life Ltd [2017] NZHC 871; and Taylor v Asteron Life Ltd [2018] NZHC 2939.[175] Seventh, Mr Beck submitted that the Judge had erred in awarding increasedcosts under r 14.6(3)(b) of the High Court Rules on the basis of his findings thatMr Taylor had deliberately made false claims, had given evidence that was unreliable,and had not had his income affected by his incapacity. Increased costs should beawarded only where the unreasonable conduct relates to the proceedings, and mustoccur after those proceedings were commenced. In this case, Mr Beck submitted, theconduct of the proceeding could not be described as unreasonable: Mr Taylor hadeffectively been penalised because the Judge did not accept his evidence.[176] Ms Meechan responded that the modest uplift in costs awarded by the Judgewas appropriate and ought not to be disturbed. The uplift was not based on the Judge'sview about Mr Taylor's behaviour while the claim was live, but rather the way inwhich he conducted the litigation.[177] We accept Ms Meechan's submission. The uplift was modest. It was awardedbecause the Judge considered that the costs of the litigation were increased byunmeritorious arguments which Mr Taylor elected to run at trial. The Judge found thathe must have known that his claim lacked merit. By pursuing the claim he forcedAsteron to undertake an extensive forensic exercise to demonstrate that lack of merit.He discovered false sets of accounts and called a witness to provide an explanation inrelation to those accounts that was shown to be incorrect. Asteron was required to callexpert accounting evidence to address these matters.53 These were proper grounds foran award of increased costs.[178] Eighth, Mr Beck submitted that the Court should have ordered reduced costsbecause Asteron contributed unnecessarily to the time and expense involved inthe proceeding by taking or pursuing unnecessary steps.54 Mr Beck submitted thatAsteron took a number of steps, in particular in relation to discovery and third partydiscovery, that significantly increased the total time and expense of the proceeding.He suggested a 25 per cent reduction in costs would be appropriate.53 Interest/costs judgment, above n 2, at [10].54 High Court Rules, r 14.7.[179] Ms Meechan responded that the defence and counterclaim were conductedprofessionally and appropriately. Asteron had a high bar to clear in order to provefraud against Mr Taylor. It was only able to do so through extensive discovery, andanalysis of the information provided. The award of costs was reasonable andappropriate.[180] We accept Ms Meechan's submission on this issue. Asteron set out to establishfraud, in circumstances where all the relevant information was in the possession ofMr Taylor or third parties. In order to do so Asteron reasonably sought extensivediscovery and third party discovery, subpoenaed witnesses, and called a number ofexpert witnesses. The same information asymmetry that underpins the fraudulentclaims rule means that it will typically be difficult and costly for an insurer to establishthat the rule has been breached. Asteron took steps to make out its defence andcounterclaim that were well justified in light of that information asymmetry. There isno justification for a reduced award of costs.[181] In summary, we dismiss all of Mr Taylor's challenges to the costs awarded inthe High Court other than his objection to inclusion in the disbursements claimed ofa scheduling fee of $1,600. The costs awarded are reduced by $1,600.Costs on appeal[182] Mr Taylor's appeal in respect of his own claim was unsuccessful. He enjoyeda modest measure of success in his appeal concerning Asteron's counterclaim. He waslargely unsuccessful, with one minor exception, in relation to the numerous issues heraised concerning interest and costs.[183] Overall we consider that Asteron was the successful party, and is entitled toan award of costs. We do not consider that the modest success enjoyed by Mr Taylorjustifies a reduction in that award.[184] We award costs to Asteron for a standard appeal on a band A basis, with usualdisbursements. We certify for two counsel.Result[185] The application for leave to adduce further evidence on appeal is declined.[186] The appeal is allowed to the extent set out in [187] and [188] below. It isotherwise dismissed.[187] The judgment entered for Asteron on its counterclaim is reduced by$51,835.64. This reduction in the judgment sum will have consequences forthe interest component of the judgment: if the parties cannot reach agreement on thatissue, we reserve leave to either party to file a memorandum seeking determination bythis Court of the necessary adjustments to the interest component of the judgment.[188] The costs award to Asteron under the judgment is reduced by $1,600.[189] Mr Taylor must pay costs to Asteron for a standard appeal on a band A basis,with usual disbursements. We certify for two counsel.Solicitors:Peter Sara Lawyer, Dunedin for AppellantSuncorp NZ Employees Ltd, Auckland for Respondent