THE DUTY OF DISCLOSURE - KNOWING WHAT THE INSURER WANTS TO KNOW
I am not sure that what the Supreme Court of New South Wales has recently said about this issue is correct. You might have a different view. Either way, I think this case illustrates an interesting and important point.
The Insurance Contracts Act affects most but not all policies of insurance governed by Australian Law. Section 21 prescribes the features of the duty of disclosure. Subject to some exceptions, the duty requires an insured to disclose every matter which satisfies the following requirements:
The owners of a brothel made a claim for indemnity in respect of damage which their brothel suffered in a fire. The insurers denied indemnity because the owners had not disclosed before the inception of the relevant policy that they were members of an outlawed bikie gang.
In the course of dismissing the claim for indemnity, the Supreme Court of New South Wales had to determine whether the owners of the brothel knew or a reasonable person in the circumstances knew that their membership of the bikie gang was relevant to the insurer’s decision to accept the risk and if so, on what terms.
The Court’s Decision
It is important to remember that Section 21 is set in the context of legislation that favours the insured. It, therefore, places a burden upon the insurer to make it quite clear to an insured what is and what is not relevant to its decision to accept the risk.
The proposal form did not ask the insured any question about membership of an outlawed bikie gang. The insurer’s guidelines in relation to this particular type of risk, and all of its other documents relating to this particular type of risk, said nothing about membership of outlawed bikie gangs.
How then could an insured or a reasonable person in the circumstances know that membership of the bikie gang was relevant to the decision of the insurer to accept the risk and, if so, on what terms?
The Court acknowledged that the proposal form and insurer’s guidelines and documents were silent about the issue. But it noted the general question at the end of the proposal form requiring the insured to notify anything else that might be relevant to the decision to accept the risk. That requirement, the Court said, informed the insured or a reasonable person in the circumstances that membership of the bikie gang was relevant to the insurer’s decision to accept the risk and, if so, on what terms.
But that conclusion still begs the question. Why would the insured or a reasonable person in the circumstances know that these matters are relevant?
The link between what the insured knows and its understanding of what is relevant to the
insurer’s decision is a critical one. In this case, the insurer did nothing to alert the insured to the fact that membership of the outlawed bikie gang was relevant to its decision to accept the risk.
I think that much more should have been required.
The name of the case is Stealth Enterprises Pty Limited t/as The Gentleman’s Club v Calliden Insurance Limited  NSWSC 1270.