The New South Wales Court of Appeal has recently handed down a unanimous decision endorsing the approach taken in Stealth Enterprises on the issue of non-disclosure. The decision reinforces the need for underwriters to ask specific questions in a proposal form in relation to common risks in the prospective insured's industry, or otherwise risk the Court determining that the general duty of disclosure does not require the insured to disclose information relevant to those risks.
The recent decision of Marketform Managing Agency Ltd v Amashaw Pty Ltd (Marketform) concerned consecutive policies of combined liability insurance (Policy) issued by Marketform Managing Agency Ltd (Marketform) to Amashaw Pty Ltd (Amashaw) to provide cover for the operation of a petrol station in Loftus, New South Wales. Among other things, the Policy indemnified Amashaw against pollution liability that was the direct result of a sudden specific and identifiable event occurring during the Period of Insurance.
Shortly before the Policy was entered into, Amashaw received a report identifying a plume of dissolved petroleum hydrocarbons in groundwater beneath the petrol station (the First Report). The First Report was not disclosed to Marketform during the underwriting process. Relevantly, the Policy's proposal form drew Amashaw's attention to its general duty of disclosure, however, no questions were specifically directed to the subject of pollution.
In March 2012, before the Policy was renewed, Amashaw received a further report showing concentrations of such hydrocarbons to be generally stable or slightly lower (the Second Report). The Second Report was not disclosed to Underwriters before renewal.
During the period of cover under the renewed Policy, the plume increased due to a substantial leak of petrol which eventually resulted in an explosion occurring on 3 June 2013. A claim was advanced on the Policy in respect of losses suffered by Amashaw.
Marketform declined the claim on a number of bases, including that the failure by Amashaw to disclose the First Report before the Policy was entered into, and the Second Report before the Policy's first renewal, amounted to a breach of the insured's duty of disclosure under Section 21 of the Insurance Contracts Act 1984 (Cth) (ICA).
First instance decision
At first instance, the New South Wales Supreme Court found that Amashaw had not breached its duty of disclosure. It held that a reasonable insured could not be expected to know that the First Report and Second Report were relevant to Marketform's decision to accept the risk, and if so on what terms.
Specifically, the Court found that:
- As Marketform was a regular insurer of service stations, it could be taken to be aware of the 'obvious fact' that such sites were likely to be contaminated; and
- What was described as the 'critical question' in these circumstances was whether the reasonable insured would 'know' from the reports that the circumstances of this risk were materially different "from that which could be assumed to exist by the insurer" because the subject property was a petrol station.
The primary Judge concluded that there was nothing in the reports that signified anything other than the existence of contamination that one would expect to be present having regard to the history of the site. Accordingly, the primary Judge found that the insured was not required to disclose either of the reports under its general duty of disclosure under the ICA.
Interestingly, although it did not change the outcome of the matter, the primary Judge also found that, if the reports were disclosed to Marketform, an exclusion would have been included in the Policy which would have excluded cover for the claim.
On appeal, the Court unanimously agreed with the conclusion of the primary judge that the insured had not breached its duty of disclosure. The implication is an endorsement of the first instance decision that the insured's general duty of disclosure did not require it to disclose matters that "could be assumed" to exist by the insurer because of the use of the insured property. The Court of Appeal did not reverse the finding that an applicable exclusion would have been included in the Policy if the reports were disclosed to Marketform.
As stated above, it was accepted that if the reports in issue were disclosed to Marketform, an exclusion would have been included in the Policy which excluded cover for the claim. In other words, it was accepted that the reports were relevant to the underwriter's decision to accept the risk, and if so on what terms.
Nevertheless, the insured was found not to have breached its duty of disclosure by failing to disclose the reports because a reasonable insured was entitled to assume that the information was not relevant because:
- Marketform was a 'regular insurer' of service stations who could be expected to know that service stations are likely to be contaminated; and
- Marketform did not ask any specific questions about pollution risk in the proposal.
The decision in Marketform expressly endorsed the approach taken on the issue of non-disclosure in Stealth Enterprises. In that case, the general duty of disclosure did not require a prospective insured to disclose that its director and manager were members of the motor cycle club known as the 'Comancheros' because the insurer was a specialist underwriter of adult entertainment and a reasonable insured was entitled to assume that, if such information were relevant to the insurer, it would have been the subject of specific questions in the proposal form.
The lesson that appears from Marketform, and its application of the reasoning in Stealth Enterprises, is that for underwriters who regularly insure participants in a particular industry, the onus may be on them to ask specific questions about common risks, or otherwise the Court may determine that the general duty of disclosure did not require the insured to disclose information relevant to those risks.
One hopes that this does not ultimately lead to a requirement to create shopping list proposal forms that address every conceivable risk that may apply to a particular business. However, the reasoning in Marketform and Stealth Enterprises certainly could be deployed in many circumstances to challenge declinatures issued on the basis of non-disclosure where there is no specific question seeking such information included within the proposal form.