ARNOLD V AMERICAN INTERNATIONAL ASSURANCE COMPANY (BERMUDA) LIMITED TRADING AS AIG LIFE HC AK CIV 2008-404-006987

ARNOLD V AMERICAN INTERNATIONAL ASSURANCE COMPANY (BERMUDA) LIMITED TRADING AS AIG LIFE HC AK CIV 2008-404-006987 4 June 2009IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2008-404-006987BETWEEN TREVOR SAMUEL ARNOLD Plaintiff AND AMERICAN INTERNATIONAL ASSURANCE COMPANY (BERMUDA) LIMITED TRADING AS AIG LIFE Defendant Hearing: 11 May 2009 Counsel: A C Hooker for plaintiff J L Land/I L Hegerty for defendant Judgment: 4 June 2009 at 2:30pmJUDGMENT OF ASSOCIATE JUDGE ABBOTTThis judgment was delivered by me on 4 June 2009 at 2:30pm, pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy RegistrarSolicitors: Turner Hopkins, PO Box 33237, North Shore City 0740 for plaintiff Kensington Swan, Private Bag 92101, Auckland 1142 for defendant[1] This proceeding concerns a claim by the plaintiff (Mr Arnold) under a life insurance policy. The defendant insurer (AIG) has applied to strike out the claim on the ground that it is time-barred. [2] The critical issue underlying the application to strike out is when the cause of action accrued. AIG says that it accrued when the life insured (Mrs Arnold) was diagnosed with a terminal illness (the event that gave rise to the claim). The plaintiff accepts that the claim is out of time if that is the correct test. However, he contends that the cause of action did not accrue until the claim was notified to AIG, in which case the proceeding has been brought within time. [3] It is common ground that the insurance policy does not stipulate a time within which a claim must be made, nor contain any express provision to the effect that liability does not arise until a claim is made. However, Mr Arnold contends that a term to that effect can be implied into the policy. He says that it is a matter for trial whether the term should be implied. [4] The question that the Court must determine, therefore, is whether it is arguable that a term can be implied into the policy to the effect that AIG's liability did not arise until Mr Arnold gave notice of his claim.Background[5] The plaintiff and his deceased wife took out a joint life insurance policy with AIG in December 1999. The policy provided for payment of a benefit in the event that a life insured was diagnosed with a terminal illness. The applicable clause (clause 8 reads):Should the Life Assured be diagnosed by a Medical Physician registered with the Medical Council of New Zealand (but excluding a physician who is him/herself the Life Assured, spouse or lineal relative of the Life Assured), as having an illness which is likely to result in the death of the Life Assured within twelve (12) months of diagnosis, a lump sum up to the amount of the Flexiterm Benefit will be paid. Benefit will be reduced by the amount of payment made.[6] Mrs Arnold (the life insured) was diagnosed with a terminal illness in early 2001. She died some four years later in April 2005. [7] In late May 2001 the plaintiff and Mrs Arnold requested cancellation of the policy. Cancellation was effected as of 3 June 2001. It is common ground that Mrs Arnold had been diagnosed with a terminal illness prior to the cancellation. Mrs Arnold died in or about late April 2005. [8] On 11 September 2007 Mr Arnold's insurance broker submitted a claim on Mr Arnold's behalf for payment of the terminal illness benefit.The application[9] AIG brings its application to strike out on the ground that Mr Arnold's claim is barred by s 4(1) of the Limitation Act 1950, which provides that an action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued. [10] The application is brought pursuant to r 15.1 of the High Court Rules which reads:15.1 Dismissing or staying all or part of proceeding(1) The court may strike out all or part of a pleading if it— (a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or (b) is likely to cause prejudice or delay; or (c) is frivolous or vexatious; or (d) is otherwise an abuse of the process of the court. (2) If the court strikes out a statement of claim or a counterclaim under subclause (1), it may by the same or a subsequent order dismiss the proceeding or the counterclaim. (3) Instead of striking out all or part of a pleading under subclause (1), the court may stay all or part of the proceeding on such conditions as are considered just.(4) This rule does not affect the court's inherent jurisdiction.[11] The Court applies the following principles when determining a strike out application (summarised from the well known passage in Attorney-General v Prince & Gardner [1998] 1 NZLR 262, 267): a) the Court proceeds on the basis that the facts pleaded to in the statement of claim are true; b) the causes of action will be struck out only where they are clearly so untenable that, even on most favourable interpretation of the facts pleaded or available, they cannot possibly succeed; c) the jurisdiction is one to be exercised sparingly and only in clear cases where the Court is satisfied that it has both the material and the assistance from the parties required for a definite conclusion; d) an application containing difficult questions of law, and requiring extensive argument, does not exclude jurisdiction. [12] The Court applies the following further principles when the application is brought on the basis that the claim is barred by the Limitation Act 1950: a) a proceeding which is clearly time-barred will be struck out either on the basis that it is frivolous or vexatious, or an abuse of process:Ronex Properties Limited v John Laing Construction Limited & Ors [1983] QB 398; b) it will be for the defendant to satisfy the Court that the cause of action is clearly statute-barred, but if it does so it will be entitled to an order unless there is an arguable case for extension or postponement which brings the claim back within time: Trustees Executors Limited v Murray [2007] 3 NZLR 721.Accrual of the cause of action[13] The cause of action under a non-liability insurance policy accrues when the insured event occurs, unless the terms of the policy provide that liability will not arise until a claim is made or certain other conditions are satisfied: Chitty on Contracts (Vol 1, 30th Edition 2008, para 28-050). [14] In the absence of policy terms to the contrary, the limitation period begins to run as soon as the insured event occurs even though no claim has been made at that time. This is because the occurrence of the insured event is treated as equivalent to a breach of contract by the insurer: Halsburys Laws of England Vol 25, 2003 reissue, para 184 (presumably by failing to hold the insured harmless in respect of the relevant loss). [15] Counsel for AIG submitted that these statements of principle were drawn from a long line of authority, which has been followed by the insurance industry over many years. He referred to two recent English authorities, in particular: Virk v Gan Life Holdings Plc [2000] Lloyds Rep IR 159 (CA) and Callaghan v Dominion Assurance Co Limited [1997] 2 Lloyds LR 541, in both of which the Court had to decide whether the cause of action had arisen within the limitation period. [16] In Callaghan the High Court construed several provisions in a fire insurance policy to decide whether the cause of action arose at the date of the insurer's avoidance of the policy rather than the date of the insured event (a fire). It found that none of them postponed the insurer's liability to indemnify from the date of the loss. The Court (Sir Peter Webster) had this to say about the nature of indemnity insurance and accrual of the cause of action (at p 544 col 2):It seems to me that the best way to define an indemnity insurance is that it is an agreement by the insurer to confer on the insured a contractual right which, prima facie, comes into existence immediately when loss is suffered by the happening of any event insured against . Unless, therefore, there are clear words in the policy which have a contrary effect, liability under this policy, being a policy of indemnity insurance, arises immediately loss is suffered as a result of the happening of the relevant event.[17] In Virk the Court of Appeal was asked to construe a policy providing indemnity for "critical illness". The policy contained a clause that made payment dependent upon the life insured being alive thirty days after diagnosis. The Court viewed the thirty day survival as "an essential requirement of the event in respect of which the sum assured is payable". It found that the period of survival was a condition precedent to the insurer's liability. Potter LJ had this to say about accrual of the cause of action (at p 162):It is common ground that a contract of indemnity insurance is an agreement by an insurer to confer on an insured a contractual right to indemnity which on the face of it comes into existence immediately when loss is suffered by the happening of an event insured against . the law has long been that, because an insurance policy is to be construed as insurance against the occurrence of an insured event, the occurrence of that event is treated as equivalent to a breach of contract by the insurer. Accordingly, in the absence of policy terms affecting the matter, the limitation period begins to run as soon as the insured event occurs, even though no claim has been made: see generally Colinvaux: Law of Insurance7th ed, para 9-15, page 200. . the prima facie position as I have described it may be displaced or require modification as a result of express terms in the policy appropriate to create a condition precedent to the insured's right to payment.[18] When construing policy terms with a view to determining when the insurer's liability commences, the Courts have distinguished between matters affecting commencement of liability, and matters going to the proof of the liability and the entitlement to pursue a claim in respect of it. The operation of the Limitation Act is not suspended pending such proof, or taking of steps to establish entitlement to claim, because these are matters that lie within the power of the claimant. The law does not defer commencement of liability for such matters, as to do so would be tantamount to allowing a claimant to postpone the operation of the Limitation Act:MacGillivray on Insurance Law 9th Ed para 24-18; Coburn v Colledge [1897] 1 QB 702,709; Monckton v Payne [1899] 2 QB 603,606; Callaghan at p 546; and Virk at p 22.Can a term be implied?[19] Counsel for Mr Arnold acknowledged that there was no express term which had the effect of postponing commencement of liability. He submitted, however, that a clause should be implied into the policy that:The insurer's obligation to make payment under the claim will not arise until the insurer receives notification of a claim.[20] Counsel argued that such a term could be implied either on the facts of the case or by custom, relying on the tests for implication of terms laid down in BP Refinery (Western Port) Pty Limited v Shire of Hastings (1997) 52 ALJR 20 andOraka Technologies Limited v Geostel Vision Limited (HC Ham CIV 2005-419-809, 18 February 2009, Allan J). He referred to evidence provided by a witness who had been involved in the life insurance industry for some 20 years (Mr Rundle) to the effect that a term as proposed would accord with "the well known and invariable practice of the life insurance industry", and was necessary to make the contract work (an insurance company could not be expected to meet a claim under a life insurance policy if it was unaware of the event giving rise to the claim). He submitted that it was open to the Court to imply such a term (relying on Tillotson v ANZ Life Assurance Co Limited (1997) 9 ANZ Insurance Cases 77,131), and that the evidence of Mr Rundle was sufficient to establish an arguable case for the purpose of this application. [21] Counsel for AIG submitted that the proposed term could not be implied as a matter of law. He argued that to do so would cut across the long established authority under which clear and express words are required to defer the point at which liability arises from the date that the insured event occurs. He submitted thatTillotson was not authority in respect of accrual of a cause of action for limitation purposes. It was concerned with a requirement to take a procedural step as a pre- requisite to pursuing a claim. [22] Counsel submitted that the practice to which Mr Rundle referred (no payment being made without notice of claim first having been given) was, at best, a condition precedent to making a claim and did not affect the accrual of the cause of action. Hereferred to evidence from a consulting actuary for AIG that insurers base their reserves for non-notified claims under life policies on anticipated reporting of claims within defined periods. He said leaving it to the insured to decide when to bring a claim (rather than focus on the happening of the insured event) would create substantial difficulties for risk assessment by insurers. [23] I accept, in principle, that terms can be implied into to a life insurance policy either in the particular facts of the case or from industry practice or custom. I also accept that it will normally be a matter for trial whether or not the facts justify the implication in a given case. There will be cases, however, where it will be possible for the Court to say that as a matter of law that a proposed term cannot be implied. That will be the case where the implied term would run contrary to established authority. In my view this is such a case. [24] The law as to accrual of causes of action under non-liability insurance policies as (set out above) is not in dispute: the right to indemnity, and hence the cause of action, comes into existence immediately loss is suffered by the happening of the insured event, except to the extent that that prima facie position is displaced or modified by express terms in the policy. Counsel for Mr Arnold sought to persuade me that there was no reason to require an express term, as distinct from an implied term, to the contrary. He argued that the Courts in Callaghan and Virk had not had to consider the possibility of an implied term to the contrary. I cannot accept that argument. The passages that I have quoted from Callaghan and Virk refer respectively to "clear words in the policy" and "express terms in the policy". In the cases referred to by counsel, the Courts were being asked to find that the parties intended liability to commence at a time other than the happening of the insured event by reference to the language of the policy. That is an orthodox approach to contract interpretation, where the Court attempts to give meaning to all the wording of the contract. It is significant that counsel did not refer me to any case where a term was implied to defer accrual of the cause of action so as to extend the limitation period.[25] The safer analysis, however, may be that the implication of the proposed term can never satisfy the tests for an implying a term in fact or by custom set out in BP Refinery (Western Port) Pty Limited v Shire of Hastings and Oraka Technologies Limited v Geostel Vision Limited respectively. [26] Counsel for Mr Arnold argued that whether or not the term was reasonable and equitable, necessary to give business efficacy, and obvious or in accordance with industry custom and practice, are matters of fact for trial. He properly acknowledged, however, that it was a logical consequence of the proposed implied term that Mr Arnold could, in effect, decide when to bring his claim (the policy being silent as to the time within which any claim was to be made). [27] This proposition was rejected in Callaghan (where a similar submission was made), in the following passage (p 546 col 2):. If Mr Fisher's submission is right about the construction of this clause, an insured could postpone the beginning of the relevant limitation period by delaying giving notice, and for this reason alone any Court would lean against such a construction – see the Court's comments on such a situation inCoburn v College [1987] 1QB 702 at p709 (which I need not cite) and inMonckton v Page, [1899] 2 QB at p 608 (which I need not cite either).[28] A similar view was taken by this Court in General Accident Fire & Life Insurance Company Limited v Direct Fish Supplies Limited (HC Napier 29 June 1982, Quillam J). In that case the Court was asked to determine when the cause of action accrued under a policy of burglary insurance. The insurer contended that it accrued either on the happening of the event insured against (the burglary) or at latest when the insured complied with a clause in the policy requiring it to give notice of the claim within 14 days of the insured event. The insured submitted that the cause of action did not accrue until the appellant had notified its rejection of the claim. The claim was time barred if either of the insurer's contentions were accepted, but was within time if the insured's argument was accepted. The Court held that the cause of action accrued from the date of notification, and stated in relation to the insured's arugment (at p 4):. It was argued further, for the respondent, that there was no reason to suppose the claim would not be met until it had been rejected. That would not, however, affect the time at which the cause of action accrued. It mayhave been regarded as churlish for the respondent to issue proceedings the moment the provisions of cl 4 had been complied with, but there can, in my view, be no doubt of its right to have done so. To hold otherwise would mean that an insurer could delay the issue of proceedings against itself by the simple device of not stating whether the claim was accepted or rejected.[29] I find that this consequence of the proposed implied term would cut across the provisions of the Limitation Act, and is so contrary to reasonable commercial expectations that it could not be said that it was required for business efficacy and so obvious that it went without saying, nor that it was so certain, reasonable and of such notoriety that the parties must have intended it to form part of the contract. I cannot accept that the parties would have intended to let the insured decide when to bring a claim, regardless of the Limitation Act. [30] Finally, I find that Mr Arnold's claim also fails even if his proposed implied term were to be allowed. [31] Mr Rundle states that in about 20 years of experience in the life insurance industry he had never known a single case in which an insurer had paid a claim for death or illness without first being notified of that death or illness. On that basis he expresses the view that anyone working in the life insurance industry would expect that the insurer's obligation to pay would only arise once the insurance company had been notified of that person's death. Even if the term could be implied, the giving of notice is a matter lying within the power of Mr Arnold. As such it is not a matter going to the accrual of the cause of action, but rather a condition going to proof of the cause of action and Mr Arnold's entitlement to sue: MacGillivray on Insurance Law para 24-18.Decision[32] I find that Mr Arnold's cause of action accrued at the date of diagnosis of Mr Arnold's terminal illness, and that that diagnosis was made prior to 3 June 2001 (the effective date of cancellation of the policy). Accordingly, Mr Arnold's claim is clearly statute barred, and has to be struck out as an abuse of process of the Court. I order accordingly.[33] As the successful party, AIG is entitled to costs of and incidental to this application on a 2B basis together with disbursements as fixed by the Registrar. ____________________Associate Judge Abbott