A recent Australian, New South Wales Court of Appeal case1 decided that an insurer could reject an insured’s claim because:
- When applying for a trade credit policy (which insured against the insolvency of the insured’s customer), the insured failed to disclose to the insurer that on three occasions the customer to which the policy related agreed to make additional payments to the insured to comply with the insured’s 21 day payment terms (payment plans).
- The insurer was successful in proving that, had the insurer known of these payment plans, the insurer would not have issued the policy to the insured (because it would have considered the customer an unacceptable insolvency risk).
- Accordingly, the insurer was entitled to reduce its liability under the policy to nil in accordance with s 28(3) of the Insurance Contracts Act 1984 (Cth). That section broadly provides that, where an insured fails to comply with its duty of disclosure upon entering a contract of insurance, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred.
This case provides an example of the how a failure of disclosure can affect an insurance policy responding to a claim.