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Owner of brothel makes claim on insurance policy following
On 1 January 2012, there was a fire in a brothel which was run
from premises in the Australian Capital Territory. The extent of
damage from the fire was such that the brothel had to cease
The brothel was insured under a specialised Adult Industry
Insurance Policy which provided cover against property damage,
including by fire, and public and product liability.
The insurance was initially issued for the period 3 September
2010 to 3 September 2011 and subsequently renewed for 12 months to
3 September 2012.
After the fire, the company that ran the brothel made a claim
under the renewed insurance policy, which was current at the time
of the fire.
Insurance company denies liability due to non-disclosure
Under Australian law, prior to entering into the insurance
contract an insured has a duty to disclose to the insurer any
relevant matter that a reasonable person in the
circumstances could be expected to know to be relevant.
The insurer denied liability on the basis that at the time the
policy was renewed, the brothel owner had failed to comply with its
duty of disclosure.
Case a - The case for the insurer
Case b - The case for the brothel
- The company that ran the brothel did not disclose that its sole
director and manager were both members of a bikie gang. Disclosure
of this association was relevant and would have affected our
decision to accept the risk of insuring the appellant's
premises against property damage and public liability.
- In our view, an association with an organisation like a bikie
gang would have increased the risk of property damage, because such
organisations are commonly involved in gang rivalry and acts of
retribution, which may result in property damage.
- We would have associated the bikie gang with illegal
activities, which may have increased the risk of an insured event
occurring, particularly property damage. For these reasons, we
would have declined to renew the insurance policy had the
association been disclosed.
- Furthermore, the company failed to disclose that the
brothel's registration under the ACT's Prostitution Act
1992 had lapsed due to a failure to lodge an annual notice. Had the
company made this disclosure, we would have declined to renew the
- The company's failure to comply with its duty of disclosure
entitles us to reduce our liability to nil.
- If we were required to disclose affiliations with bikie gangs
or the like, this should have been clearly stated on the insurance
proposal form, but it wasn't. We had no idea that the
association with a bikie gang was relevant to the insurer's
decision to accept the risk of insuring the brothel's
- An insurer offering an insurance policy specifically targeted
at the adult industry should expect that people with criminal
connections, including members of bikie gangs, are likely to be
involved in the use of the premises.
- The association with a bikie gang did not create an additional
risk that would not have otherwise been present, given that the
premises were being used as a brothel.
- The insurer's own guidelines did not identify an
association with a bikie gang as grounds for declining to provide
insurance coverage. There was no evidence that the insurer had ever
declined coverage on this basis, or even that it had ever made
enquiries of other prospective clients about such
- We were also not aware that the brothel's registration had
lapsed. Had we been aware of it, we would have renewed it.
So, which case won?
Vote case A – the case for the insurer
Vote case B – the case for the brothel
Cast your judgment below to find out
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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