Australia: Adult industry insurance policies and the dangers of undisclosed risk

IN BRIEF - INSURERS SHOULD TAKE STEPS TO OBTAIN WHATEVER INFORMATION THEY CONSIDER NECESSARY TO ENABLE THEM TO EVALUATE WHETHER OR NOT TO INSURE A RISK

The NSW Court of Appeal in Stealth Enterprises Pty Ltd t/as The Gentlemen's Club v Calliden Insurance Limited (2017) NSWCA 71 ordered the insurer to pay the insured brothel owner for property damage caused by fire, even though the insured did not disclose affiliations with the Comancheros bikie gang and the brothel's lapsed registration.

PRIMARY JUDGE'S FINDING

The facts and findings are set out in the headnote to the decision. In summary the following was relevantly said in the headnote:

The appellant (Stealth) insured owned and operated a brothel from premises in the ACT. Those premises were insured against property damage and liability by the respondent insurer (Calliden) under its "Adult Industry Insurance Policy" which was marketed to the owners and operators of such businesses. On 1 January 2012 the premises were damaged by fire. The appellant made a claim under the renewed policy current at the time of that fire.

The insurer denied liability on the basis that at the time the policy was renewed, the appellant had failed to comply with its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) in two respects. The first matter not disclosed was that the appellant's sole director and manager were members of the Comancheros bikie gang. The second was that at the time of renewal, the brothel's registration under the Prostitution Act 1992 (ACT) had lapsed due to a failure to lodge an annual notice.

The primary judge found that the appellant had failed to comply with its duty of disclosure in relation to each of these matters and that, had they been disclosed, the respondent would not have renewed the policy and been on risk at the time of the fire. Accordingly, the primary judge held that the respondent was entitled to have its liability reduced to nil under s 28(3) of the Insurance Contracts Act.

INSURED SUCCESSFULLY APPEALS PRIMARY JUDGE'S DECISION

Stealth appealed. The issues in the appeal were:

i. Whether a reasonable person in the circumstances of the appellant insured could be expected to know that the association between the appellant and the Comancheros bikie gang was relevant to the insurer's decision whether to accept the risk by renewing the policy (Insurance Contracts Act, s 21(1)(b)).

ii. Whether, had the disclosure of that association been made, the insurer would not have been on risk at the time of the fire, so was entitled to have its liability reduced to nil (Insurance Contracts Act, s 28(3)).

iii. Whether at time of renewal in September 2011 the appellant insured knew that registration of the brothel had lapsed or not been maintained (Insurance Contracts Act, s 21(1)(a)).

iv. Whether, had the fact of the lapsed registration been disclosed to the respondent, it would not have renewed the policy or otherwise insured the premises, so was entitled to have liability reduced to nil (Insurance Contracts Act s 28(3)).

The NSW Court of Appeal held allowing the appeal:

In relation to (i):

It was not established that a reasonable person in the circumstances could be expected to know this association was relevant to the insurer's underwriting decision

A reasonable insured could understand that an underwriter specialising in the insurance of brothels would expect that people with criminal connections were likely to be involved in the use of the premises:

If it was relevant to the insurer to know of the fact of any general association between the insured and any particular activity or organisation, a reasonable insured might have expected that there would be questions in the proposal addressed to that subject:

The fact of the membership association did not give rise to any matter relied on that a reasonable person would not have expected to arise from the nature of the use of the premises as a brothel. The association without more could not be expected to justify a different or more adverse underwriting assessment than the risk described in the proposal:

In relation to ii:

It was not established that had disclosure of the association been made the insurer would not have renewed the policy

There was no contemporaneous and objective evidence supporting the underwriter's assessment that she would have declined to renew the policy had the association been disclosed. The evidence as a whole did not support the finding that, had the respondent insurer been made aware of the association, it would have declined to renew the policy:

In relation to iii:

The insured was aware of the fact of the lapsed registration.

The primary judge did not err in inferring that the insured was aware that its registration had lapsed on 30 September 2010 and that it required a further notice be given:

In relation to iv:

It was not established that had disclosure of the lapsed registration been made the insurer would not have renewed or otherwise insured the premises at the time of the fire.

There was evidence from which the Court might reasonably infer that had there been disclosure of the lapse of registration, the appellant would have remedied the problem of its registration and subsequently obtained insurance so that the respondent insurer would have been on risk at the time of the fire. In the face of that evidence the insurer was not entitled to reduce its liability to nil.

The NSW Court of Appeal ordered that Calliden pay its insured $500,000, interest and certain costs.

INSURER'S INTERNAL GUIDELINES FAILED TO IDENTIFY RISK OF WRITING POLICY FOR ADULT INDUSTRY PREMISES

In paragraphs 79-82 of the Court of Appeal's judgement, Sackville AJA said:

80
SACKVILLE AJA: I agree with Meagher JA that a reasonable person in the circumstances could not have been expected to know that Stealth's association with the Comancheros "bikie gang" was a matter relevant to the decision of the respondent insurer (Calliden) to accept the risk of insuring the premises occupied by the appellant (Stealth).
81
At first blush this may seem a surprising conclusion, given that there was evidence that the involvement of bikie gangs in a business may create a risk of harm to the business or to the premises on which it is conducted. However the question posed by s 21(1)(b) of the Insurance Contracts Act 1984 (Cth) (Act) has to be addressed in the present case in the context of the business model of an insurer actively seeking to write policies for "adult industries", including brothels.
82
Calliden appreciated that the business of conducting a brothel was likely to attract people of dubious repute, who might have an association with bikie groups or other "outlaw" organisations. Calliden, through its employed underwriters, knew in 2011 that members of bikie gangs were involved in the adult industry. Yet despite this knowledge Calliden did not ask Stealth or other proponents any questions about their affiliation with disreputable or illegal organisations. Calliden's internal guidelines, which had been prepared specifically for the purpose of identifying risks in the adult industry that Calliden wished to insure, did not identify a proponent's association with a bikie gang or similar organisation as a ground for declining to provide coverage against the risk of damage to property from fire. Nor did Calliden adduce evidence that it had made inquiries about the bikie affiliations of brothel owners seeking insurance coverage or that it had ever declined to cover a person or business with such affiliations.

SPECIAL LEAVE TO APPEAL TO HIGH COURT AND COLIN BIGGERS & PAISLEY COMMENT ON DECISION

It is understood that application for special leave to appeal is to be made to the High Court. Pending the outcome of that special leave application it can, in summary, be said about the NSW Court of Appeal's decision that whilst the case was decided on its own particular facts, the Appeal Court's decision does indicate that it is not necessarily an easy matter for an insurer to succeed in making out an allegation of non-disclosure under section 21 of the Insurance Contracts Act or being entitled to relief under section 28 of that Act.

Robert Tuck
Insurance and reinsurance
Colin Biggers & Paisley

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.

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