All insurers owe a duty of disclosure under s21 of the Insurance Contracts Act 1984 (Cth). In this article, Senior Associate Anna Hendry considers the extent of the duty of disclosure and the consequences of non-disclosure with reference to the recent decision in Stealth Enterprises Pty Limited trading as the Gentleman’s Club v Calliden Insurance Limited  NSWSC 1270.
Stealth Enterprises Pty Limited (Stealth) ran a brothel known as The Gentleman’s Club. Baris Tukel was the sole director and shareholder and the “guiding mind” of Stealth. His brother, Fidel Tukel, was the brothel manager. Both Baris and Fidel were members of the Comancheros motorcycle club. Stealth completed a proposal for insurance with Calliden in 2010 and later a proposal for renewal of that insurance in September 2011.
The renewal form required Stealth to disclose any criminal convictions in the last 5 years, as well as any other relevant matters but did not specifically ask about membership of outlaw motorcycle clubs. Fidel completed the September 2011 proposal and certified that “no information has been withheld that would affect Calliden’s decision to accept this proposal”. Fidel did not disclose his or Baris’ involvement in the Comancheros and did not disclose that registration of the brothel under the Prostitution Act 1992 (ACT) had lapsed. Calliden renewed the policy based on the proposal.
On 1 January 2012 there was a fire at Stealth’s premises which resulted in damage to the premises and Stealth ceasing to trade. Stealth made a claim against the policy but Calliden declined indemnity on the basis that Stealth ought to have disclosed:
- The association between Baris and Fidel and the Comancheros (the association matter); and
- That it did not hold the relevant registration (the registration matter).
In relation to each of the matters, the court was required to consider:
- Whether the matter was relevant to the decision of the insurer whether to accept the risk;
- Whether Stealth knew that the matter was relevant to the insurer’s decision;
- Whether the matter was one which a reasonable person in the circumstances could be expected to know was relevant to the insurer’s decision; and
- Whether, if the matter had been disclosed, the insurer would have renewed the policy.
The court accepted:
- That the association matter was relevant even though it was the association between a director/manager and the Comancheros, not the association between Stealth and the Comancheros. This was based on expert evidence that bikie gangs would commit acts of violence and property damage against rival gang members at their homes and workplaces, thus exposing Stealth to an increased risk of property and personal injury;
- That both the association and registration matters were relevant to the insurer’s decision as to whether to accept the risk. This was based on evidence provided by the underwriters involved in the 2010 policy and the 2011 policy renewal;
- That Stealth knew that the matters were relevant to the insurer’s decision and that a reasonable person could be expected to know that. This was based on a finding that it was common knowledge by 2010/2011 that the Comancheros were an outlaw motorcycle club and that outlaw motorcycle clubs are known to engage in activity which may result in property damage and personal injury; and
- That if the matters had been disclosed, Calliden would not have renewed the policy. This was based on evidence provided by the underwriters that they would have considered the risk posed by the association to be excessive and that they would not have renewed coverage in circumstances where the appropriate registration had not been obtained.
The court also held that, while the non-disclosure was not fraudulent, Calliden was entitled to reduce the level of indemnity by 100%, effectively resulting in a total withdrawal of coverage.
Take Away Points
This case is a reminder that disclosure is not limited to the questions asked in the insurance proposal form, and that matters concerning the insured’s directors or other key personnel might be required to be disclosed. When completing proposal forms, it is important to think carefully about all the circumstances of the business taking out the policy in order to ensure that full disclosure is made because failure to make full disclosure can result in the complete withdrawal of indemnity.