The story

Late in the evening on New Year’s Day 2012, a brothel called The Gentlemen’s Club located in a sleepy industrial estate in north Canberra went up in flames. The Brothel was closed at the time and no one was injured, though it was significantly damaged by fire and smoke. The authorities immediately suspected arson and forensic investigators were deployed.

The Brothel closed down due to the extensive fire damage and the owner claimed under his ‘Adult Industry Insurance Policy’ with Calliden Insurance, seeking half-a-million dollars for property damage and business interruption.

Piqued by the suspicion of arson, Calliden did some digging and discovered that the owner was a Sergeant-In-Arms in the Comancheros Motorcycle Gang and the manager of the Brothel (his brother) was also a member of the gang.

Coinciding with the national roll-out of anti-bikie legislation, the media picked up the developing story and it was quickly revealed that the Brothel was also not licensed to trade as a brothel at the time of the fire, as its registration had lapsed without renewal.

Calliden rejected the Sergeant-In-Arms’ insurance claim on the basis that he had failed to disclose his bikie ties and the Brothel was unlicensed. Calliden’s senior underwriters and gave evidence that they would not have offered the insurance had they known, because:-

  1. “motorcycle gangs such as the Comancheros and similar gangs are involved in gang rivalry and from time to time seek retribution which may result in property damage”.
  2. “Comancheros with illegal activities which may have increased the risk of an insured event occurring, particularly property damage and public liability risks”.[1]

The Sergeant-In-Arms lawyered up and fought the insurer on the basis that the business was totally legitimate, despite his bikie connections.

What the court said

A person or business that takes out insurance has an obligation to tell the insurer about anything that they think may impact the insurer’s decision to offer an insurance policy, the extent of the insurance cover or the amount charged for coverage (ie. premiums and excesses).[2] The test for disclosure takes an objective standard – that of a hypothetical reasonable person – and requires a determination as to whether a reasonable person in the circumstances could be expected to know that the matter was relevant to the insurer’s decision to accept the risk.

When the matter was first heard, the Supreme Court accepted the underwriters evidence that it was ‘common knowledge’ that outlaw bikie gangs engaged in activities that could result in property damage and that created a considerably higher risk for the insurer, which it would not have accepted, particularly if it knew that the Brothel was also un-licensed.

At the time, the decision presented as an authority for insurers to rely on to escape losses arising from legitimate businesses that had ties to criminal associations, particularly bikie gangs.

The Sergeant-In-Arms continued to fight the insurer to the Court of Appeal where the Supreme Court decision was overturned. The Court of Appeal said the Sergeant-In-Arms did not have to disclose his bikie connections to Calliden because:-

  1. Calliden insured and specifically targeted brothels with its coverage options and it therefore appreciated that people of “dubious repute” (ie. members of bikie gangs) were likely to be involved in the use of those brothels;
  2. there were no questions on Calliden’s insurance application form about ties to criminal enterprises; and
  3. there was nothing in Calliden’s underwriting policies at the time of the fire which mentioned criminal ties being a determinative factor in deciding whether to offer insurance or not, nor was there any evidence that it had ever refused to offer insurance due to ties to bikie gangs.

The Court also accepted that the Sergeant-In-Arms was aware that his license had lapsed and that Calliden would not have insured a non-licensed brothel though acknowledged that it was a quick and inexpensive process for the Sergeant-In-Arms to renew the license. As Calliden would have offered insurance once the license had been renewed, the Court said the insurance would have been capable of being accepted by the Sergeant-In-Arms prior to the fire.

The fallout

Whilst it’s uncommon to see the courts find for criminal enterprises- particularly bikies, the decision perhaps enforces the general reluctance of the courts to deny indemnity to people and businesses that take out insurance.

To our mind, sympathies must go to Calliden- it seems that if it had simply asked more direct questions in its policy application forms, it would have been in with a shot. It is difficult to see, particularly from a layman’s view, how questions would not have been asked by the insurer if the owner had written “Sergeant-in-arms, Comancheros Bikie Gang” on the application form as something that potentially may have affected Calliden’s decision to offer insurance.

The decision perhaps reinforces the need for insurers to ‘do their homework’ when assessing a risk by carrying out background checks on owners. Further, it is important for an insurer to adduce contemporaneous and objective evidence from senior underwriters as to what they would have done had withheld information been disclosed at the time a policy was written

It will be interesting to see whether Calliden decide to push the matter further to the High Court.

The full judgment of Stealth Enterprises Pty t/as The Gentlemen’s Club v Calliden Insurance Limited is available for free here.