Insured entitled to indemnity for fire/ property damage to a brothel under an Adult Industry Insurance Policy despite non-fradulent non-disclosure of their association with the Comancheros bikie gang, and of the lapse of brothel's registration under the Prostitution Act 1992 (ACT).
- Non-disclosure of a relevant fact under s21 ICA;
- Whether a reasonable insured could be expected to know that an association with a bikie gang, and the lapse of registration of a brothel, is relevant to an insurer’s decision to insure a risk;
- Establishing whether an insurer would have been on risk but for non-disclosure under s28 ICA.
Stealth Enterprises Pty Ltd (Stealth) owned and operated a brothel in the ACT. The brothel was insured for fire and business interruption loss under an Adult Industry Insurance Policy renewed by Calliden Insurance Limited (Calliden) in September 2011. In January 2012, a fire damaged the brothel, and a claim was lodged by Stealth.
Calliden refused to indemnify Stealth on the basis that it failed to disclose that the brothel was owned and managed by brothers associated with the Comancheros bikie gang, and that the brothel’s registration under the Prostitution Act 1992 (ACT) lapsed in 2011. Calliden alleged that it would not have accepted the risk had these facts been disclosed, and was entitled to reduce its liability under the policy to nil pursuant to s 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA).
Decision at trial
The trial judge found that a reasonable person in Stealth’s position would have known that the undisclosed facts were relevant on the basis that it was common knowledge that the activities of the Comancheros may lead to property damage. Further, the trial judge accepted evidence that the policy would not have been renewed had either of the facts been disclosed.
Issues on appeal
The NSWCA had to consider whether a reasonable person in Stealth’s position could be expected to know that the undisclosed facts were relevant to Calliden’s decision to insure the risk and/or renew the policy and whether had disclosure of these facts been made, Calliden would have been on risk on at the time of the fire.
Decision on appeal
The Court of Appeal unanimously held that Stealth was entitled to be indemnified under the policy despite the non-disclosure.
It was found that a reasonable person in Stealth’s position could not have been expected to know that their association with the Comancheros was relevant. Stealth could expect Calliden, who specialised in adult industry insurance, to be aware of the risks associated with brothels, including criminal connections, and in the absence of evidence that the brothel was controlled by the Comancheros, Stealth’s association could not be expected to justify more than a general risk of insuring adult businesses. Further, if the association was relevant, a reasonable person in Stealth’s position could have expected questioning of such matters in the insurance proposal.
While it was considered that Stealth should have disclosed the registration lapse, it was not established that, had this fact been disclosed, Calliden would not have been on risk at the time of the fire as the evidence suggested that Stealth would have remedied the registration lapse (by paying a small fee) and subsequently obtained insurance. The Court of Appeal specifically warned against the perils of hindsight in the evaluation of oral evidence when considering a hypothetical declinature of indemnity, particularly without contemporaneous, objective evidence, such as underwriting guidelines.
Implications for you
Insureds may be entitled to indemnity despite non-fraudulent non-disclosure. The onus is on insurers to establish prejudice when declining indemnity pursuant to ss 21 & 28 ICA which, in practical terms, can be difficult. The decision emphasises the importance of insurers having clear underwriting guidelines. Such guidelines constitute objective evidence of the matters the insurer thinks important when deciding whether or not to accept a particular risk. Not only are the guidelines useful when prospectively assessing an application for cover, but also retrospectively if it emerges that the insured might not have made complete disclosure. The decision also underlines the importance of ensuring that the proposal documents specifically address issues that the insurer considers important when deciding whether or not to grant cover.