The Supreme Court of Victoria has considered whether plans to demolish buildings are relevant to an insurer’s decision whether to accept the risk.
The insured purchased a property with the intention of demolishing the buildings, which were being operated as a rooming house at the time and constructing a new house. In the meantime, he leased it to the person operating the rooming house and obtained landlord’s insurance. Before the policy was issued, the insured completed a New Policy Declaration which asked: “Is the property … to be demolished?”. The insured answered “no” and the policy was issued. The insured subsequently renewed the policy three times, the last time for the year ending 21 December 2014.
On 17 September 2014 the buildings were substantially damaged by fire. The insured made a claim under the policy which was denied. The insurer submitted that the insured had failed to disclose his intention to demolish the buildings, gave a false answer in the Declaration and did not, in any event, suffer loss because at the time of the fire he intended to demolish the buildings. Litigation ensued.
The Court considered the insured’s intention as at the last renewal before the fire. The Court found that, although the demolition project was on hold while the insured considered purchasing an alternative residence, it had not been completely abandoned. The insured gave evidence that he would not have authorised demolition unless and until he secured a formal offer of finance. The Court did not accept this as the insured had undertaken substantial steps to implement the project. Amongst other things, he had obtained building plans and quotations, moved out the tenant and sub-tenants and applied to extend the demolition permit.
The Court further found that the insured’s intention regarding the demolition was a matter relevant to the insurer’s decision to accept the risk. The Court said this finding was both common sense and supported by evidence. The Court noted that property owners are less likely to maintain a property that is going to be demolished. Moreover, periods of vacancy while a property is being prepared for demolition increase the risk of vandalism, particularly where the property is derelict. The insurer’s underwriting guidelines and oral evidence confirmed that demolition plans were blanket unacceptable risks.
Whilst the Court accepted that the insured did not know his intention to demolish was relevant to the risk, a reasonable person in the same circumstances could be expected to have known that it was. Accordingly, the Court held that the insured had breached his duty of disclosure. The Court further held that the insured’s answer of “no” in the Declaration constituted a misrepresentation that was continuing as at the renewal date. As the insurer would never have issued the policy if the insured had disclosed the prospect of demolition and answered “yes”, the Court reduced the insurer’s liability to nil by operation of section 28 of the Insurance Contracts Act. The Court did not consider whether the insured suffered loss for the purposes of the policy because it was unnecessary to do so.
Bergman v CGU Insurance Limited
This case demonstrates that an insured’s intention to demolish buildings is relevant to acceptance of the risk. Failure to disclose such intention at policy inception or on renewal may lead to the insurer’s liability being reduced to nil.