In O’Farrell v Allianz Australia Insurance Ltd1, Australia’s New South Wales Court of Appeal decided that an insurer could not, under a motor vehicle policy, refuse to cover an insured for the insured’s stolen motor vehicle on the basis that the insured did not comply with his duty of disclosure under Australia’s Insurance Contracts Act 1984 (by not disclosing to the insurer two sets of convictions for offences arising out of brawls).
Section 21 of Australia’s Insurance Contracts Act 1984 (Cth) (Act) provides that an insured has a duty of disclosure, as follows:
“an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that —
(a) 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
(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant.”
The Act also provides, however, that, with respect to “eligible contracts of insurance” (including motor vehicle policies):
- An insurer is taken to have waived the requirement to comply with the duty of disclosure unless, amongst other things, it requests the insured to answer one or more specific questions relevant to its decision whether or not to accept the risk and, if so, on what terms (section 21A).
- The insurer must clearly inform the insured in writing, before the contract of insurance is entered into, of the general nature and effect of this duty of disclosure (section 22(1)).
- If an insurer does not comply with section 22(1), the insurer may not exercise a right in respect of a failure to comply with the duty of disclosure, unless that failure was fraudulent (section 22(3)).
In this case, there was no allegation that the insured had been fraudulent. The insured had signed a document that the insurer provided to him that stated, amongst other things, that he declared that he had read “the information concerning the Duty of Disclosure” and that he realised that if he had “not complied with [his] Duty of Disclosure, [his] claim may not be met”. The insured also signed a “Motor Insurance Proposal”, which contained a number of “Important Notices”, including a paragraph headed “Your Duty of Disclosure”.
Notwithstanding these circumstances, the Court decided that it was open to the lower administrative tribunal to find that the insurer could not rely upon a breach of the insured’s duty of disclosure to refuse cover because the insurer did not clearly inform the insured of the matters identified in section 22(1) and section 21A of the Act before entering into the contract. This was because:
- From the Court’s judgment, it appears that the insurer’s broker did not specifically ask the insured about his criminal convictions when the insured purchased the policy.
- The insurer did not direct the insured to the language on the first page of the “Motor Insurance Proposal” at the time he was asked to sign the final page, or at any previous point in time.
The Court further observed that it is doubtful whether, unless expressly so informed, reasonable car owners would treat criminal convictions arising out of a brawl as relevant to the risk insured under a comprehensive motor vehicle policy.
This case is a good example of the extent of an insurer’s obligation to inform insureds of their duty of disclosure and the importance of asking all potentially relevant questions and drawing the insured’s attention to all relevant information relating to that obligation.