This is a timely reminder of the importance of an Insured’s duty of disclosure and the broker’s important role in avoiding a breach.
In Kalabakas v Chubb Insurance Company of Australia VSC 705 an insured who fraudulently omitted to disclose information about the structural soundness of his residence was denied cover when his residence was damaged by fire.
Applying the well known principles of the duty of disclosure, the Court held that Chubb was entitled to avoid liability based on what Mr Kalabakas and his broker ‘knew’ and did not disclose. Facts of the case
In August 2007, Mr and Mrs Newlands (the Newlands) contracted with Mr Ratcliffe of Ratcliffe Building Group (RBG) to build a dwelling to lock up stage. A building permit was issued to RBG by a building surveyor. The design specifications were provided by CBG Consulting Engineers Pty Ltd (CBG). Construction commenced in October 2007.
On 2 June 2008, a certificate of final inspection certifying that the dwelling had been completed to lock up stage in accordance with the relevant drawings and design specifications was issued. Shortly thereafter RBG observed problems with the structural beams in the property and alerted CBG.
Later in June 2008, the Newlands commenced proceedings in the Victorian Civil and Administration Tribunal (VCAT) against CBG and RBG in relation to the need for rectification works on the property. Ultimately the VCAT accepted evidence given by the Newlands’ structural engineer, that multiple aspects of the design of the dwelling were inadequate and that it should be demolished or require extensive structural rectification. Orders were made in May 2010 that CBG pay the Newlands the sum of $400,000 on account of the structural defects and $59,503 for building defects. No adverse findings were made against RGB.
In the second half of 2010, Mr Kalabakas purchased the property from the Newlands for the sum of $1.2 million, discounted by $680,000 to cover building and construction costs. At this time, no certificate of occupancy had been issued for the dwelling.
On 2 December 2010, Mr Kalabakas arranged insurance cover for the property and dwelling with Chubb through a broker. The broker discussed Mr Kalabakas’ insurance requirements with him over the telephone, asking a series of questions and recording Mr Kalabakas’ answers on a quotation sheet as follows:
- Question: Year of construction. Answer: 2007.
- Question: Is the house currently occupied? If no, when? Answer: Settlement is in couple of weeks.
- Question: Has the property been renovated? Answer: Yes.
The broker submitted the quotation sheet to Chubb who, on 7 December 2010, issued a Delux House Coverage policy of insurance. This Policy was renewed on 28 November 2011.
Unfortunately for Mr Kalabakas, the dwelling and its contents were damaged by fire in July 2012.
Mr Kalabakas made a claim under the Policy. Chubb declined the claim, avoiding the Policy by reason of the fraudulent misrepresentations and non-disclosures by Mr Kalabakas in the quotation sheet, which misrepresentations and non-disclosures continued on renewal. In the alternative, Chubb contended that it was entitled to reduce its liability to nil.
Mr Kalabakas commenced proceedings against Chubb seeking indemnity under the renewed policy. Chubb defended the proceedings on the basis that Mr Kalabakas breached his duty of disclosure and that the plaintiff had made positive misrepresentations prior to entering into the policy. Quantum was not in issue.
The judgment provides a useful summary of the applicable principles with respect to an insured’s duty of disclosure to its insurers. Relevantly:
- the duty of disclosure applies to that which is ‘known’ by the insured that would be relevant to the insurer assessing risk before entering into a contract of insurance;
- a matter is only known if the insured actually has it in his or her consciousness or which exists in some record or source that the insured actually knows about and to which that person had access;
- knowledge is that of a reasonable person, and does not take into account the ‘individual idiosyncrasies’ of an insured such as their unfamiliarity with business or insurance practices; and
- non-disclosure or misrepresentation will be fraudulent if it is ‘deliberate’, or made with an absence of actual and honest belief in its truth, or recklessly, not caring whether it is true or false (‘consciously indifferent’ to the truth of answers given).
The Court found that Mr Kalabakas knew:
- that the construction of the dwelling was not completed as at 2 December 2010 (being the date the policy was taken out);
- about the existence of the VCAT dispute and that CBG had been ordered to pay a sum of money to the Newlands (although he did not know what that sum was);
- that there were serious structural defects with the dwelling. To this end Mr Kalabakas had contracted with a third party to ‘repair the framework structure’ of the dwelling and ‘repair all balconies’. He had however not retained a structural engineer to remedy those defects. As such, the structural issues were never adequately addressed; and
- (when he purchased the property) that there was no current building permit in place with respect to the premises and a valid occupancy certificate had never been issued with respect to the dwelling.
Her Honour was satisfied that each of these matters:
- were relevant to Chubb’s decision as to whether to provide insurance in respect of the dwelling; and
- were deliberately, alternatively recklessly, not disclosed to Chubb.
Having found so, Her Honour was satisfied that the failure to disclose this information to Chubb was fraudulent and that Chubb was entitled to avoid the policy from its inception. Alternatively, Her Honour found that even if fraud cannot be established, Chubb would, in accordance with its underwriting guidelines, have declined to provide cover if any of these four matters had been disclosed to Chubb (at inception of the Policy and on renewal). This entitled Chubb to reduce its liability to nil.
Of interest to brokers is the lengths to which the judgment considers Mr Kalabakas and the broker’s evidence in respect of their communications with each other in determining what Mr Kalabakas knew. This is because, as agent of Mr Kalabakas:
- the actions of the broker are actions attributable to Mr Kalabakas; and
- knowledge of the broker as to what was relevant to Chubb’s decision, is treated as knowledge of Mr Kalabakas.
Implications of the decision
This decision serves as an important reminder of an Insured’s duty of disclosure to its Insurers and the grave consequences when falling short of this duty. In this case, the Insured’s non-disclosure and misrepresentation left him more than $1.721 million out of pocket (not including costs). Insofar as the broker and client relationships are concerned:
- the broker (as agent of Mr Kalabakas) was held to know each of the four relevant matters in Mr Kalabakas’ knowledge; and
- the broker’s knowledge about what would be relevant to Chubb’s decision to provide cover was knowledge attributable to Mr Kalabakas.
Brokers are reminded to take care when eliciting answers to insurer’s questions from their client. When giving advice to their clients about their duty of disclosure, brokers will be well advised to place themselves in the mind of the insurer and consider the context in which the insurers’ questions are being asked, thereby ensuring that the answers elicited are true and correct.