Risk Ahead

A recent decision of the NSW Court of Appeal sheds some light on what an insured’ duty of disclosure obliges the insured to do.

Section 21 of the Insurance Contracts Act sets out an insured’ duty of disclosure:

The insured’s duty of disclosure

(1)  Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a)  the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b)  a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to:

(i)  the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and

(ii)  the class of persons who would ordinarily be expected to apply for insurance cover of that kind.

(2)  The duty of disclosure does not require the disclosure of a matter:

(a)  that diminishes the risk;

(b)  that is of common knowledge;

(c)  that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or

(d)  as to which compliance with the duty of disclosure is waived by the insurer.

(3)  Where a person:

(a)  failed to answer; or

(b)  gave an obviously incomplete or irrelevant answer to;

a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

The facts and contentions

Stealth Enterprises Pty Ltd (Stealth) owned premises from which it operated a brothel and which premises were insured under an Insurance policy with Calliden Insurance Ltd (Calliden).

The premises were damaged by fire. Calliden denied liability to indemnify Stealth on the basis that Stealth had failed to comply with its duty of disclosure under s 21 of the Insurance Contracts Act 1984.

Calliden contended that Stealth did not disclose that its sole director, and his brother who managed the brothel, were members of the Comancheros bikie gang.

Nor did it disclose that the brothel’s registration had lapsed.

The proceedings

Stealth commenced proceedings against Calliden. The primary judge held that Stealth had failed to comply with its duty of disclosure and Calliden was not liable to indemnify Stealth.

Stealth appealed to the NSW Court of Appeal.

The Court of Appeal held there was no breach by Stealth of its duty of disclosure under s 21 in relation to the fact that its director and employee were members of the Comancheros bikie gang. The Court of Appeal did find that Stealth breached its duty of disclosure by failing to disclose the lapse of the brothel’s registration. In relation to this non disclosure, the Court of Appeal held that it did not entitle Calliden to have its liability to indemnify Stealth reduced.

The Court of Appeal held that the test for disclosure under s 21(1)(b) of the Insurance Contracts Act was that of a hypothetical reasonable person and concluded that a reasonable person was not expected to know that an association between a brothel owner and a bikie gang created a risk over and above the inherent risk in insuring a brothel such that it would have been relevant to the insurer’s decision to accept the risk.


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