In Ferryboat Pty Ltd & Red Gecko Pty Ltd v JUA Underwriting Agency Pty Ltd & Ors [2008] NSWDC 209, Judge Rolfe in the NSW District Court reinforced that an insurer must be able to prove that non-disclosure by an insured when entering into a policy of insurance is significant, in order to maintain declinature of cover under the policy when a claim is made.
Background
In May 2001, David Bell purchased premises consisting of two lots of land. On one lot was a building with a heritage classification which was leased to the operator of a takeaway business. The other lot was vacant land.
Mr Bell planned to establish and run a cafe/restaurant in the building once the existing lease expired.
The property was purchased by Ferryboat Pty Ltd (first plaintiff), a company owned by Mr Bell. The business was operated by a second company, Red Gecko Pty Ltd (second plaintiff).
By around March 2001, the Red Gecko Restaurant had been established by Mr Bell and was trading from the first floor of the building.
Red Gecko owned the trading stock for the business and both Red Gecko and Ferryboat owned the plant and equipment for the business.
Red Gecko took over the running of the business around September 2001. At about that time, Mr Bell contacted an insurance broker, Mr Parker.
Mr Parker obtained a quote from JUA Underwriting to insure Red Gecko for the period 26 September 2001 to 26 September 2002 to cover contents, stock and public liability.
An insurance proposal was not completed until 9 January 2002. Mr Bell accepted that when he signed the proposal he had read the details in it, including advice regarding:
- His duty of disclosure under the Insurance Contracts Act 1984 (Cth).
- His duty to disclose 'everything you know, or could reasonably be expected to know, which may affect our decision to accept your insurance or the terms under which we accept it'.
- The consequences of non-disclosure.
Initially, Ferryboat insured separately. However, when the insurance came up for renewal in May 2002, the insurances were consolidated with JUA Underwriting. A proposal was not filled in by Ferryboat when Ferryboat became covered under the JUA Underwriting policy or during the period of insurance.
On 20 September 2002, Mr Parker requested that JUA Underwriting renew the policy. On 24 September 2002 a schedule of cover was sent to Mr Bell confirming the combined insurance cover for the period 26 September 2002 to 26 September 2003.
In April, June and September 2002 the restaurant was broken into and some minor items of property were stolen. Further thefts and unlawful entries occurred in February and June 2003. On 7 August 2003, the buildings, plant, machinery, stock and other contents belonging to Ferryboat and Red Gecko were either destroyed or badly damaged by a fire.
Non-disclosure
A claim was lodged with JUA Underwriting. However, JUA Underwriting refused to indemnify the plaintiffs on the basis of non-disclosure.
An insured's duty of disclosure is contained in section 21 of the Insurance Contracts Act. An insured is required to disclose, before a contract of insurance is entered into, every matter that is known to the insured being a matter that:
- The insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
- A reasonable person in the circumstances could be expected to know to be a matter so relevant.
The alleged non-disclosures relied on by JUA Underwriting were that:
- On more than one occasion the premises had been broken into resulting in damage, theft and reports to the police.
- The premises were the subject of a heritage protection order.
- Mr Bell had received correspondence by people threatening to boycott his business (after he fenced the vacant lot which had been used informally by locals for a number of years).
- The plaintiffs were in negotiations with the local Council to develop the premises.
- The business was operating at a financial loss.
JUA Underwriting's underwriter stated that he was unaware of all of these matters until after the fire. He stated that if he had been informed of the matters set out above at the time of renewal in September 2002, or at inception in September 2001, he would not have offered to insure either company on any terms.
Trial
Judge Rolfe considered the plaintiffs' actual knowledge of the need to disclose the matters complained of by JUA Underwriting other than the break-ins. He found Mr Bell to be a truthful witness who gave his evidence in a straightforward and careful manner. Mr Bell said he did not know that any of the matters (set out above) would be relevant to his insurer.
On that basis, Judge Rolfe stated that it would be necessary for JUA Underwriting to establish that a reasonable person in the circumstances would have been expected to know that such matters were relevant to the insurer's decision to accept the risk. The question of whether a reasonable person in the circumstances could be expected to know what matters were material, is a matter of fact to be determined by the Court.
Judge Rolfe confirmed that the onus was on JUA Underwriting to establish that a reasonable person in Mr Bell's shoes could have been expected to know of the materiality of the above matters.
In its evidence, JUA Underwriting relied on the underwriter's statements that the matters were material. Contrary to his findings regarding Mr Bell, Judge Rolfe found JUA Underwriting's witness to be unsatisfactory. His Honour concluded the witness did not adequately elaborate on the basis for the reasons he gave in asserting the materiality of the matters outlined above, and said he sought to advocate the cause and defence of JUA Underwriting to the detriment of the insured.
Judge Rolfe favoured the evidence of the insurance broker, Mr Parker, who was described as a very experienced insurance broker working in the insurance industry since 1981 and specialising in arranging insurance for cafes and restaurants.
With regard to the five matters set out above, Mr Parker stated that he did not consider they would be material from the underwriter's point of view.
Mr Parker said that based on the practice which had been developed between himself and the underwriter over a number of years, he did not think it was necessary to disclose the break-ins or other matters to the insurer as he did not consider the incidents were material from JUA Underwriting's point of view.
Judge Rolfe said to the extent the underwriter sought to establish a practice on the part of the insurer on matters such as the break-ins, his evidence was in tatters as no documents were produced by JUA Underwriting to support his assertions. The Court inferred there were no firm practices or solid guidelines in place to assist JUA Underwriting in determining such matters.
In particular, Judge Rolfe noted that the underwriter was prepared to assume the risk knowing nothing more than the name and address of Red Gecko and did not even bother to obtain a proposal from Ferryboat.
Judge Rolfe concluded that in regard to the break-ins, he considered the circumstances of each were relatively trivial. With regard to his acceptance of Mr Parker's evidence and his rejection of the evidence of the underwriter, in his opinion a reasonable person in the place of Mr Bell would not have considered those events to be material as far as the defendants were concerned. A reasonable person in such circumstances would, therefore, not have reported or disclosed those events to the insurer.
On that basis, the insurers failed in their defence of material non-disclosure.
Implications
The decision of Judge Rolfe reinforces the need for insurers who decline claims on the basis of non-disclosure to ensure the underwriting evidence is available. Evidence needs to be provided to back up any assertion that a particular risk would not have been covered or would be covered on different terms.
The insurer in this case would have been assisted by firm underwriting guidelines to substantiate the assertions being made. The absence of such documents, combined with Mr Parker's evidence of the underwriter's actual practice, left the insurer without a leg to stand on.
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