A recent decision from Emmett J in the Federal Court provides an important reminder to insurers wishing to plead fraudulent non-disclosure as a defence to an insurance claim.

The decision of Ensham Resources v Aioi Insurance Company [2012] FCA 537 is a reminder to insurers that a delay in pleading fraudulent non-disclosure may be fatal to any application to amend pleadings to allege fraud.

The case arises out of a flooding of a coal mine in Queensland’s Bowen Basin in January 2008 following which a claim exceeding $500M was submitted under an industrial special risks insurance policy. Following investigations, insurers declined the claim on grounds of material non-disclosure following which proceedings were commenced. In brief terms, insurers alleged that the mine had failed to provide proper disclosure concerning the risk of flood to the mine. No allegation of fraudulent non-disclosure pursuant to section 28(2) of the Insurance Contracts Act 1984 (Cth) was made at this time.

In due course insurers filed a defence pleading material non-disclosure but did not allege that the non-disclosure was fraudulent. The proceedings progressed in the usual way with orders made for discovery and service of evidence and documents were produced in response to subpoenas. A number of the discovered or subpoenaed documents caused insurers to re-consider the issue of fraudulent non-disclosure and an application to amend the defence to plead fraud was made.

The amendment application was strenuously opposed by the mine. Central to the mine’s opposition was its position that all the information on which insurers now sought to rely in pleading fraud was information known to insurers prior to the commencement of the proceedings and this delay was unexplained. Emmett J ultimately accepted that the information relied upon by insurers was new information and any delay in pleading fraud had been satisfactorily explained. In reaching his decision Emmett J also recognised insurers would suffer prejudice if the amendment was not allowed and this outweighed any prejudice suffered by the mine due to the delay that would follow from the amendment being allowed.

This decision then is an important reminder to insurers (and parties to litigation generally) that they must not delay in pleading fraud if the allegation can be properly made. It is also a reminder that in deciding to allege fraud, there must be a proper basis for doing so (and in the case of insurers, their obligations of good faith demand that a proper basis exists for declining a claim on grounds of non-disclosure or otherwise). To the extent that there has been any delay, such delay must be adequately explained, preferably in a manner that outweighs any prejudice suffered by the other party as a result of the delay