The Supreme Court of NSW was recently faced with a decision dealing directly with Section 21 of the Insurance Contracts Act 1984 (Cth) regarding the insured's duty of disclosure in the case of Stealth Enterprises Pty Ltd t/as The Gentleman's Club v Calliden Insurance Limited [2015] NSWSC 1270.
Her Honour Justice Schmidt, held that the insurer could reduce its liability under a policy to nil where the insured had failed to disclose relevant information upon renewal of a policy where it had been proven that, had the necessary disclosures been made, the policy would not have been renewed by the insurer.
FACTS
The plaintiff company, Stealth Enterprises Australia Pty Limited ("Stealth"), owned and operated a brothel in the ACT which traded as "The Gentlemen's Club".
The brothel's premises were insured for fire and business interruption under a policy renewed by the defendant insurer Calliden Insurance Ltd ("Calliden") in September 2011.
On 1 January 2012 a fire damaged Stealth's premises and resulted in the brothel ceasing to trade. Calliden refused to indemnify under the policy on the basis that Stealth failed to comply with disclosure obligations imposed upon it by the Insurance Contracts Act 1984 (Cth) and that this failure entitled it to reduce its liability under the policy to nil, claiming that if there had been proper disclosure of relevant matters the policy would not have originally been issued in 2010 or renewed in 2011. Stealth brought a claim for breach of the insurance contract.
Calliden denied indemnity for two reasons. Firstly, that Stealth failed to disclose that the sole director (Mr Baris Tukel) and his brother and manager of the brothel (Mr Fidel Tukel), were associated with the Comancheros bikie gang and, secondly, that the brothel was no longer registered under the Prostitution Act 1992 (ACT), when the policy was renewed in 2011.
THE LEGISLATION
Section 21 of the Insurance Contracts Act requires that the insured discloses to the insurer every matter which the insured knows (or a reasonable person in the insured's position would know) is relevant to the insurer's decision on whether to insure the risk.
The remedies for non-disclosure open to an insurer are outlined in section 28 which stipulates that the insurer is entitled to reduce its liability to an amount that would place the insurer in a position in which the insurer would have been had the failure not occurred. If there was fraudulent misrepresentation, the insurer may avoid the contract altogether.
Calliden pleaded both fraudulent and innocent non-disclosure. The court held that there was no fraudulent non-disclosure.
THE ISSUES
The main issues were:
- Whether the membership of the Tukel brothers of the Comancheros and the non-registration of the business were matters relevant to the insurer whether to accept the risk;
- Whether Stealth would have known these matters were relevant;
- Whether a reasonable person in Stealth's position would know they were relevant;
- If the membership and non-registration had been disclosed, would the insurer would have accepted the risk.
THE DECISION
Calliden called evidence from an expert witness from the NSW Police Force regarding the activities of bikie gangs which was accepted by the court and resulted in a finding that, in 2010, bikie gang activities were "widely known" to result in property damage and personal injury (at 94). The court therefore accepted that the membership of the Tukel brothers to the Comancheros was relevant to the risk.
The defendant also called evidence from their underwriters who gave explanation of Calliden's procedures for processing policy renewals and evidence regarding the application made by Stealth for the insurance policy in 2010 and renewal in 2011. The court accepted this evidence and accepted that the registration of the business under the Prostitution Act was also relevant.
Despite the fact that there was no specific question asked of the plaintiff as to the matters of bikie gang membership or registration of the business, Her Honour stated:
"Disclosure of relevant things which are not known to the insurer and about which questions are not asked in an application form, is where the duty imposed by s21 on an insured bites." [175]
She was therefore satisfied that a reasonable person could be expected to know that membership with the Comancheros was relevant to Calliden's decision to accept the risk noting that by 2010 it was common knowledge that the activities of the Comancheros and its members may lead to property damage and personal injury.
The court also accepted the evidence of Calliden's underwriters that the policy would not have been renewed if it had been disclosed that the Tukel brothers were members of the Comancheros and that the business was no longer registered under the Prostitution Act.
TAKE HOME POINTS
- If an association with an outlaw bikie gang is not disclosed then an insurer may potentially refuse indemnity and reduce its liability to nil where there has been innocent non-disclosure of these matters;
- The test remains whether the insured knew or whether a reasonable person in the insured's position knew of the relevant matters. Expert evidence should be produced to show that the insured ought have known of the relevant matters.
- Once it is established that the matter is relevant, the next test is whether the insurer would have accepted the risk had there been disclosure of the relevant matters. It is therefore crucial that the insurer is able to produce evidence as to its usual underwriting practices.
- Even where there is no specific question as to certain matters on an application form for a contract of insurance, the onus is on the insured to disclose what a reasonable person in the insured's position would consider to be relevant to the insurer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
