On Wednesday 5 April 2017, the Court of Appeal of New South Wales handed down its judgment that overturned Stealth Enterprises t/as The Gentleman’s Club v Calliden Insurance Limited [2015] NSWSC 1270[1].

You can review our previous article here: http://www.williamroberts.com.au/News-and-Resources/News/Articles/Bikie-Membership-Invalidates-Brothel-s-Insurance-Claim, however by way of brief background, Stealth Enterprises Pty Ltd (Stealth) operated a brothel in the ACT. The brothel was insured against property damage and liability by Calliden Insurance Limited (Calliden). On 1 January 2012, the brothel was damaged by fire and Stealth made a claim on their insurance policy. Calliden denied the claim on the basis that Stealth had failed to disclose that a) its director and manager were members of the Comancheros and b) the brothel’s registration had lapsed.

As you may recall, the original decision by Schmidt J in the Supreme Court of NSW found in favour of the insurer, determining that:

  • it was a matter of common knowledge that the Comancheros were involved in activites that may result in property damage or personal injury;

  • as it increased the chance of an insured event, a reasonable person in the position of Stealth could be expected to know that the association was relevant to Calliden’s decision to accept the risk; and

  • if Stealth had disclosed either the association, or the lack of registration of the brothel, Calliden would not have entered into the policy.

The Court of Appeal overturned Schmidt’s J decision in relation to both of the undisclosed facts (for two completely different reasons). The questions considered by the Court of Appeal were:

  • Did Stealth know, or could a reasonable person in Stealth’s position be expected to know, that the association with the Comancheros was relevant to Calliden’s decision to accept the risk?

  • If the association had been disclosed, would Calliden have refused to enter into (or renew) the policy?

  • Did Stealth know that the brothel’s registration had lapsed?

  • If the registration lapse had been disclosed, would Calliden have refused to enter into (or renew) the policy?

Should Stealth have known the association with the Comancheros was relevant?

The Court of Appeal accepted that the association with the Comancheros probably increases the likelihood of property damage or personal injury; however, because Calliden specialised in insuring adult entertainment businesses, the Court of Appeal found that an insured could expect Calliden to have already taken into account the likelihood of criminal connections (including connections with motorcycle gangs) and an increased likelihood of property damage as part of the general risk of insuring a brothel business. Relevantly:

  • the insurance package offered by Calliden was specialised and targeted at adult entertainment businesses (including brothels, swingers clubs, strip clubs, and lingerie/fetish restaurants);

  • the policy inception form stated that the insured was not required to disclose matters that Calliden ought to know in the course of its business; and

  • Calliden conceded that it knew that members of bikie gangs were involved in the adult industry.

Calliden’s case was also harmed by the factors listed in the policy inception questions (which asked about prior criminal offences, but did not ask for any further criminal associations) and the factors listed in the underwriting guidelines (which did not mention any criminal associations as being a concern, despite the likelihood of that being the case in the adult industry).

Would Calliden have accepted the risk if the association with the Comancheros had been disclosed?

Even if the above finding had gone Calliden’s way, the Court of Appeal also found that Calliden had failed to prove that it would not have entered into the policy if the association with the Comancheros had been disclosed. This finding was partly based on the above point – that the underwriting guidelines did not make any mention of criminal associations, and partly on the fact that the underwriting representative who gave evidence was not the original decision maker, and was giving evidence about a hypothetical situation.

The Court of Appeal indicated that such evidence (given through the ‘prism of hindsight’) ought to be given less weight, unless it is backed up by objective evidence, such as underwriting guidelines or practices. The Court noted that, in the circumstances, the evidence could also have been backed up by further evidence from the representative’s manager, which might have been particularly illustrative where Calliden’s underwriting guidelines were silent.

Did the insured know of registration lapse?

This was a ground of appeal, but the Court of Appeal did not consider this controversial and dealt with it quickly. The evidence suggested that Stealth did know (or ought to know) the registration had lapsed.

Would Calliden have accepted the risk if the lapsed registration had been disclosed?

The Court of Appeal found in favour of Stealth on this point for the following reason. In order to complete registration, Stealth had to fill out a form and pay $160. The evidence suggested that if Calliden had refused the policy on the basis that the brothel was not registered, Stealth could have, and would have, lodged the necessary form and rectified the issue, then re-applied for the same insurance policy.

The Court noted that the burden was on Calliden to prove that Stealth would not have or could not have done this, and the Court was satisfied that Stealth could easily have completed those steps before the fire occurred. Accordingly, the Court was not satisfied that Calliden would not have been on risk at the time of the fire.

We apprehend that insurers may express two main concerns arising from the judgment:

1. Has the bar been lowered in relation to what a reasonable person in the position of an insured ought to know?

We think probably not. The Court of Appeals’ decision on this point was almost entirely due to the fact that Calliden specialises in insuring businesses in the adult entertainment industry (including brothels) which are more likely to have criminal and/or bikie gang associations.

We consider it unlikely that the same outcome would have arisen from a policy in a dissimilar industry, or a business that cannot be said to ordinarily have criminal associations.

In fact, the judgment may actually favour insurers in those industries as the Court in this case confirmed that an association with motorcycle gangs probably increases the chance of property damage or personal injury.

2. Has the bar been raised in relation to the evidential burden of proving whether an underwriter would accept a risk?

Possibly yes. The Court of Appeal quite clearly held that evidence from an underwriter that a risk is unacceptable, was not enough on its own.

However, if that underwriter’s opinion is supported by underwriting guidelines and practices, or evidence is obtained from several underwriters, or senior underwriters, the Court will almost certainly be satisfied. Further, it might be enough if an underwriter can give evidence of similar policies which were refused on the same basis (which Calliden was not able to do, when pressed).

In any event, we dare to say that Calliden is very likely to try and take this one step further and apply for special leave. So stay tuned!