Wealth by Stealth? Bikies and Brothels May Mix!

Key Points

• The NSW Court of Appeal has reinforced the importance of both the questions in proposals and accurate underwriting guidelines.

• Questions in proposals are seen by some as an impediment to the policy issuing process but the failure to ask the correct questions can be costly.

On 5 April 2017, in Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71, the New South Wales Court of Appeal handed down an important decision on the topic of the insured’s duty of disclosure and the insurer’s remedies.

The appellant insured owned and operated a brothel from premises in the ACT.  Those premises were insured against property damage and liability by the respondent insurer under its “Adult Industry Insurance Policy” which was marketed to the owners and operators of such businesses.

On 1 January 2012, the insured property was damaged by fire and the insured made a claim under the policy.  The insurer denied liability on the basis the appellant had failed to comply with its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) (ICA) in two respects including, relevantly for the purpose of this blog, that the insured’s sole director and manager were both members of the Comancheros bikie gang.  The primary judge found that the insured had failed to comply with its duty of disclosure and that, had there been disclosure, the insurer would not have renewed the policy and been on risk at the time of the fire.  Accordingly, the primary judge held that the insurer was entitled to have its liability reduced to nil under s 28(3) of the ICA.

The insured appealed.  Relevantly, the main issues in the appeal were whether:

1. a reasonable person in the circumstances of the insured could be expected to know that the association between the insured and the Comancheros bikie gang was relevant to the insurer’s decision whether to accept the risk by renewing the policy (s 21(1)(b) ICA);
2. had the disclosure of that association been made, the insurer would not have been on risk at the time of the fire, and so was entitled to have its liability reduced to nil (s 28(3) ICA);

The Court of Appeal allowed the appeal and held that:

1. the insurer had not established that a reasonable person in the circumstances could be expected to know that the association was relevant to the insurer’s underwriting decision.  The determination of what a reasonable person in the circumstances could be expected to know had to be answered in the context, among other things, that the insurer specialised in the insurance of brothels and it would be expected that people with criminal connections were likely to be involved in the use of the premises.  Furthermore, if it was relevant to the insurer to know of the fact of any general association between the insured and any particular organisation, a reasonable insured might have expected that there would be questions in the proposal addressed to that subject.  Moreover there was no evidence that the association, without more (e.g. evidence of threats from the Comancheros; or that the brothel business was conducted for or on behalf of the Comancheros), could be expected to justify a different or more adverse underwriting assessment than the risk described in the proposal; and
2. it was not established that, had disclosure of the association been made, the insurer would not have renewed the policy.  The Court needs to guard against underwriting in hindsight.  The Court pointed out, in particular, that the insurer produced no contemporaneous and objective evidence (such as the insurer’s underwriting guidelines) supporting the underwriter’s assertion that she would have declined to renew the policy had the association been disclosed.