The insured company operated a brothel from premises located in the ACT. The premises were insured against property damage and liability pursuant to the ‘Adult Industry Insurance Policy’ issued by Calliden. On 1 January 2012, the brothel was extensively damaged by fire. The insured made a claim for damage to contents and for business interruption with Calliden.
At first instance
Calliden denied the insured’s claim on the basis that, at the time the policy was renewed, it failed to comply with its duty to disclose pursuant to section 21 of the Insurance Contracts Act (Act). Calliden’s denial was based on the fact that the insured failed to disclose that its director and brothel manager were both members of the Commancheros, an outlaw motorcycle gang (OMCG) and that it failed to disclose that the brothel’s registration had lapsed. Justice Schmidt found that the insured had failed to comply with its duty of disclosure in relation to the above matters and that, had they been disclosed, Calliden would not have renewed the policy and been on risk at the time of the fire. Accordingly, Her Honour held that Calliden was entitled to have its liability reduced to nil pursuant to section 28 of the Act.
Court of Appeal
The insured appealed to the NSW Court of Appeal which allowed the appeal and ordered Calliden to pay the insured $500,000 on the claim plus interest and costs.
Under section 21 of the Act, Calliden needed to prove that a reasonable person in the position of the insured company would have known that the insured’s association with the Comancheros was relevant to Calliden’s decision to accept the risk. The Court noted that the test is not satisfied if a reasonable person could be expected merely to have suspected that the information might be relevant to the insurer’s decision.
The Court also noted that a reasonable person in the insured’s position would have known that Calliden had a specialised scheme for adult industry risks and that Calliden understood the use of the premises as a brothel would increase the risk of property damage and liability claims given the participation by people of ‘dubious repute’ in that industry.
The Court unanimously found that a reasonable person (with this insight into Calliden’s risk appetite) could not be expected to know that the insured’s association with the Comancheros was a matter relevant to Calliden’s decision whether to renew the policy. The Court was also not satisfied that Calliden, had it been made aware of the insured’s ‘dubious’ associations, would have declined to renew the insured’s policy.
In relation to the registration not being current it was held that, had that information been disclosed (as it ought to have been), the insured would have taken simple steps to have the brothel registered (by paying $160 and filling in a form). In those circumstances it is likely that Calliden would still have been on risk on the date of the fire.
This decision confirms that the bar is set high for insurers alleging non-disclosure under section 21 and invoking remedies under section 28 of the ICA. However, outlaw bikies ought not to take too much comfort from this decision. It can be inferred from this judgment that an insured would ordinarily be obliged to disclose a close association with an OMCG when seeking cover for a mainstream commercial enterprise. The reasonable person test was resolved in the insured’s favour on this occasion mainly because Calliden was well aware of the heightened risks and dubious characters associated with brothels and because it failed to ask any specific questions about OMCG associations.