Australia: S56(1) Insurance Contracts Act Does Not Apply To False Statements Made In Proceedings

Last Updated: 8 October 2008
Article by Nathan Cutts

Douralis v Allianz Australia Insurance Limited [2008] VSCA 72


In this case, the Victorian Court of Appeal held that s56(1) of the Insurance Contracts Act 1984 (Cth) ('ICA'), which deals with fraudulent insurance claims, did not apply to fraudulent misstatements made by a claimant in the course of legal proceedings against the insurer.

Although the claimant had deposed to untrue statements in an affidavit in the proceedings, the insurer was not permitted to rely on s56 as a basis to refuse to pay the claim.

A concurrent appeal by the insurer against the trial judge's finding that, leaving aside any issue of fraud, the claimant was entitled to be indemnified under the policy was dismissed.

Moray & Agnew's Melbourne office acted for the insurer in the proceedings.


A contract of builders warranty insurance was procured by a building company, Ninety Second Sonmar, with the insurer. The contract was required by s135 of the Building Act 1993 (Vic) which provides that a builder undertaking domestic building work can only do so if it obtains builders warranty insurance.

The insured was defined by the insurance contract to be those home-owners with whom Ninety Second Sonmar entered major domestic building contracts. The policy provided that the insurer would indemnify the home-owner for any loss or damage resulting from defective building work.

The owners entered into a building contract with the director of the building company, Mr Simpson, who was a registered builder. There were a number of defects and incomplete works. The owners claimed under the policy.

The insurer denied indemnity on the basis that the owners had not entered into a major domestic building contract with Ninety Second Sonmar and so were not within the category of persons insured under the insurance contract.

The owners appealed the insurer's decision in the Victorian County Court alleging that the denial of the claim was wrongful and in breach of the policy. The owners sought a declaration that they were covered by the policy and indemnity under the policy. They argued alternatively that they were entitled to damages for misleading conduct by the insurer.

The owners unsuccessfully applied for summary judgment in the proceedings, and in support of the application an affidavit was sworn by one of the owners, Mr Douralis.

Decision at First Instance

In the course of the trial, whilst Mr Douralis was being cross examined, it emerged that several matters deposed to by him in his affidavit were untrue. Based on this development, the insurer argued that the owners had made a fraudulent claim under the policy and that the insurer was entitled to refuse payment of the claim under s56(1) of the ICA.

Section 56(1) provides that, 'where a claim under a contract of insurance... is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim.'

In opposition to the insurer's arguments, the owners submitted that, the fraudulent conduct, if any, was committed after the lodging of a claim which had been rejected, such that s56(1) had no application.

The trial judge, Judge Holt, found that Mr Douralis' affidavit contained statements that were untrue and that by deposing to the untrue statements Mr Douralis 'intended to mislead the court into concluding that [the insurer] had no valid defence to the [owner's] claim and the [the insurer's] denial of indemnity in the circumstances was mischievous and without merit.'

Judge Holt rejected the owners' submissions and held the insurer was entitled to refuse to pay the claim under s56(1).

However his Honour held that if it were not for the untrue statements and s56(1), the insurer would otherwise be required to pay the claim.


The owners appealed against the trial judge's findings in relation to s56(1). The insurers appealed against the trial judge's findings that the owners were otherwise entitled to indemnity.

The Court of Appeal held unanimously that the owners' appeal should be allowed.

Nettle JA said that the question of fraudulent misrepresentation does not have 'anything to do with representations made in evidence in the course of proceedings following the rejection of a claim.' His Honour stated that:

'I see no reason in principle why a plaintiff's claim against an insurer should any more be denied on the basis that the plaintiff has given deliberately false evidence than a plaintiff's case against any other sort of defendant is denied on the basis that the plaintiff has given deliberately false evidence.'

He stated further that:

'Regrettably, witnesses can and sometimes do tell lies in evidence, and it is to be discouraged. Hence they are liable to be punished for perjury. But they are not usually punished by being deprived of the fruits of their claim when and if they manage to prove it ...'

In a separate judgment, Dodds-Streeton JA, held that the untrue matters contained in Mr Douralis' affidavit were not made under the insurance contract, but were made in support of the alternative claims in the proceedings under the Trade Practices Act. As such s56(1) had no scope to operate.

In relation to the appeal by the insurer, Dodds-Streeton JA concluded that the trial judge had not erred in finding that the owners were entitled to be considered as insureds under the policy and were therefore entitled to indemnity. Nettle JA agreed with this conclusion.

Coghlan AJA agreed with the conclusions of Nettle and Dodds-Streeton JJA in relation to both appeals.


The Court in this case found that the reach of s56(1) does not extend to a misstatement in the course of legal proceedings to enforce a claim under the policy after the insurer had rejected the insured's claim.

Accordingly, s56(1) ICA cannot be said to provide insurers with any greater protection against the consequences of perjury beyond that otherwise available at general law.

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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