The decision in Stealth Enterprises Pty Ltd T/as Gentlemen's Club v Calliden Insurance Ltd1 demonstrates the difficulty in proving and remedying a breach of the duty to disclose information relevant to an insurer's decision to renew a policy.
The insured company owned and operated a brothel from premises in the ACT. The premises was insured against property damage and liability under an `Adult Industry Insurance Policy' (Policy) which was renewed in the 2011/2012 year. On 1 January 2012, the premises was damaged by fire and the insured claimed under the renewed Policy.
The insurer denied the claim arguing that at the time or renewal, the insured did not comply with its duty of disclosure under s21 of the Insurance Contracts Act 1984 (Cth) (ICA) by failing to disclose that:
- Its sole director and manager were members of the Comancheros bikie gang.
- The brothel's registration had lapsed.
The judge at first instance held that the insurer would not have renewed the Policy had the information been disclosed. Accordingly, as the insurer would not have been on risk at the time of the fire, its liability would be reduced to nil under s28(3) of the ICA.
On appeal, the NSW Court of Appeal considered the following:
- Whether a reasonable person in the circumstances of the insured could be expected to know that the association with the Comancheros was relevant to the insurer's decision to renew the Policy.
- Whether the insurer would have been on risk had either of the disclosures been made.
In upholding the appeal, the Court of Appeal found that the insured had not breached its duty to disclose and ordered the insurer to pay the claim plus interest and costs.
The Court of Appeal held that a reasonable person in these circumstances could not be expected to know that association with the bikie gang was relevant to the insurer's decision to renew the Policy. In reaching this conclusion, it was noted that the insurer specifically targeted brothels and other "adult industries" with its insurance scheme, and understood that people involved know that the bikie gang association would create a risk over and above the "inherent risk in insuring a brothel".
Moreover, on the evidence before the Court, the insurer had not established that had it been made aware of the association, it would have declined the renewal. It was also inferred that, had the failure to renew the brothel registration been disclosed, the insurer would have remedied the problem itself and therefore remained on risk.
Since the handing down of the judgment, the insurer has successfully applied for a stay order pending determination of its application to appeal to the High Court2. Nonetheless, the decision highlights the difficulties faced by insurers in establishing the knowledge threshold in s21 of the ICA and proving that a policy would not have renewed if disclosure was made.