Australia: Key considerations for insurers when considering renewal proposals and asserting non-disclosure

In brief - Court of Appeal upholds finding that QBE 386 not entitled to deny indemnity for alleged non-disclosure

In the recent decision of QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55, the Court of Appeal has given insurers a timely reminder of matters they must take into account when considering a renewal proposal, and when contemplating an assertion of non-disclosure by the insured.

Southern Colliery Maintenance cross-claims against QBE 386 after insurer denies indemnity

  • Southern Colliery Maintenance Pty Ltd (SCM) entered into a special services agreement in January 2005 to provide supplementary labour for five mines owned by subsidiaries of BHP Billiton, including Endeavour.
  • The special services agreement contained a number of warranties (e.g., that the work would be performed with due care and skill). It also contained an indemnity that SCM would be liable for any liability, loss or damage arising from injury of SCM's employees.
  • In 2010, Mr Newman, who was an employee of SCM and was working at a coal mine owned by Endeavour, commenced proceedings against SCM (as employer) and Endeavour (as occupier) in relation to injuries he sustained in a workplace incident.
  • Endeavour cross-claimed against SCM alleging that it was entitled to be indemnified by SCM on the basis of (1) the indemnity in the special services agreement; (2) damages for breach of contract; and (3) contribution/indemnity as a joint tortfeasor.
  • SCM made a claim on its public and products liability policy with QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 (QBE 386) in respect of its liability to Endeavour. QBE 386 denied indemnity on the basis of an assumed liabilities exclusion, and on the basis of non-disclosure of the indemnity clause in the special services agreement.
  • As a result, SCM filed a cross-claim against QBE. All claims other than SCM's claim against QBE 386 settled before the hearing in the NSW District Court. At trial, the judge found against QBE 386 on both bases. The Court of Appeal dismissed QBE 386's appeal.

This article focuses on the Court of Appeal's reasoning in relation to the non-disclosure issue and lessons for insurers that can be drawn from the decision.

Renewal proposal forms and non-disclosure of special services agreement

The crux of QBE 386's non-disclosure argument was that the special services agreement, including the inclusion of an indemnity clause, had not been disclosed before the relevant policy incepted.

The starting point for this contention was the proposal forms that SCM had submitted at each policy renewal. In each proposal form, SCM had answered "no" to the question "Do you assume liability under contracts or hold harmless?" (or words to that effect).

SCM accepted that the special services agreement had not been disclosed to QBE 386 in the original proposal or in subsequent renewals. Instead, SCM argued that it satisfied its duty of disclosure by providing what was referred to as the "Access Warning Letter".

Access Warning Letter refers to service agreement but not clear whether this is the same as special services agreement

The Access Warning Letter was written by SCM's solicitors to SCM in relation to a completely different claim (made by a Mr MacDonald) arising in a different policy year. It is not clear from the judgment whether Mr MacDonald's claim arose in relation to the same mine, or a different mine owned by a BHP subsidiary.
The letter discussed the nature of the liability SCM may have to BHP in the context of potential policy implications, and stated that:

in the service agreement which you have with Billiton, it may well contain clauses [in] which you give an indemnity to Billiton for any loss or damage which is claimed against it by one of your employees. As you know these types of claims normally arise in the case of a coal mine directly from mining operations and in the case of Mr MacDonald he is suing BHP as the occupier [of] premises ...

... MacDonald will sue or has sued BHP as an occupier and as a matter of contract BHP can seek an indemnity from SCM. ... That is the unfortunate impact of an indemnity and that liability arises purely because of promises which you have made in the contract to indemnify BHP
. (At [65].)

These comments did not definitively state that the service agreement between SCM and BHP included an indemnity (although that appeared likely). But for the facts which we will turn to, it also did not definitively state that the "service agreement" discussed in this letter was the same agreement as the special services agreement.

Circumstantial evidence of disclosure of Access Warning Letter

Not only was QBE 386 itself a managing agent for the Lloyds Syndicate, but in this case it also acted through a broker, IUS.

There was no express evidence that QBE 386 actually received the Access Warning Letter before the inception of the relevant policy. The evidence relied upon in the proceedings was circumstantial.

One piece of evidence was an email that SCM's own broker had sent to SCM, copied to IUS, saying "I have sent your email [including a copy of the Access Warning Letter] on to the insurer."

Critically, another piece of evidence was that, around nine days later, after policy inception, solicitors for QBE 386 received a copy of the special services agreement and considered it in the context of Mr MacDonald's claim.

There was a factual gap as to what had happened in between. How, why and when QBE 386's solicitors received a copy of the special services agreement is unclear. However, the Court of Appeal considered this to be evidence consistent with the notion that QBE 386 had obtained the special services agreement at some stage. The Court of Appeal also appears to have considered that this was evidence that the service agreement discussed in the Access Warning Letter was the same as the special services agreement.

In turn, this appears to have informed the Court of Appeal's view as to whether the Access Warning Letter had been disclosed and, if so, what the letter had disclosed to QBE 386. It should be emphasised that the issue before the Court was only whether the Access Warning Letter was itself sufficient disclosure in relation to the special services agreement.

Court of Appeal's findings on evidence and sufficient disclosure

The Court of Appeal made the following findings:

  • The evidence was "overwhelming" that the Access Warning Letter had been sent and the onus lay with QBE 386 to establish that it had not been.
  • Disclosure of the Access Warning Letter to IUS, as QBE 386's broker and agent, was sufficient to constitute disclosure to QBE 386.
  • A distinction is to be drawn between disclosure and knowledge. The duty of disclosure requires merely that the insured communicate a matter to the insurer, and "it is perfectly possible for that to occur by communication to the insurer's agent".
  • QBE submitted that the Access Warning Letter was not sufficient to discharge SCM's duty of disclosure because it did not disclose definitively the terms of a contract containing a contractual indemnity and would have required QBE to seek information from the insured as to whether that contract existed and whether it contained an indemnity clause. The Court of Appeal rejected this submission, finding that the Access Warning Letter was sufficient disclosure as it brought a matter to the underwriters' attention "in such a manner that they can see that if they require further information they ought to ask for it". (At [103].)

These findings were made notwithstanding what appears to have been a clear non-disclosure (or misrepresentation) in the renewal proposal forms.

It is interesting to consider the extent to which the Court of Appeal's findings were informed by the fact that QBE 386's solicitors had subsequently received a copy of the special services agreement, and the inferences which this allowed the Court to draw in relation to what happened during the factual gap and what QBE 386 knew as a result.

Without this critical fact, one may query how the Access Warning Letter would have been viewed in isolation. The Court recognised that in any case of partial disclosure there may be scope for debate as to whether sufficient disclosure has been made, and that this is "a question of degree".

Five things insurers should consider when reviewing renewal proposals or asserting non-disclosure

This decision is a useful reminder of relevant considerations for insurers when reviewing a renewal proposal, and when contemplating an assertion of non-disclosure. These include the following:

  1. If your operation uses an underwriting agent or broker, you must consider all matters that have been disclosed to them by the insured.
  2. Reliance on non-disclosures or misrepresentations in a proposal form may not be enough to found a non-disclosure argument.
  3. Matters that have been disclosed in the context of claims in the previous year(s), including claims completely unrelated to the claim under consideration, must be taken into account. It may be necessary for underwriters to review claim files and discuss in detail with claims handlers.
  4. Disclosure will be sufficient if it raises matters in a manner that underwriters can see that if they require further information they ought to ask for it. In other words, underwriters need to consider not only what a disclosure says, but also what it may suggest.
  5. The onus lies with insurers to show that matters have not been disclosed. Courts will draw inferences from circumstantial evidence to conclude that matters have been sufficiently disclosed.
Enoch Law Bronwen Peberdy
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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