Business Insurance - Australia Wide. SME and Public Liability Cover - Insurance Brokers Sydney Melbourne Brisbane Adelaide Perth Hobart - Market Stall Insurance

Duty of Disclosure

Contracts of general insurance are governed in Australia by the Insurance Contracts Act, 1984 (Cth) (the "Act"), which is a piece of legislation characterised as being designed to protect insureds so that a fair balance is struck between the interests of insurers, insureds and other members of the public.

Section 21 of the Act defines what an insured is, and is not, obliged to disclose to an insurer before a contract of insurance is entered into. However, its provisions are subject to the insurer adequately informing the insured in writing of the general nature and effect of the duty of disclosure, failing which the insurer cannot rely on a failure to disclose in order to exercise its rights to decline a claim as a result, unless such failure was fraudulent (see section 22).

Section 21(1) specifies the disclosure required of an insured as follows:

	21(1) "…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."

Accordingly, section 21(1) is concerned not just with what the insured in question actually knows but, imports the concept of the reasonable person. The test established by section 21(1) is quite different from that which had been in place at common law prior to the commencement of the Act, whereby the extent of the duty was established by reference to what a prudent insurer would consider should have been disclosed. In effect, the Act places the onus on the insurer to ask for the information that it requires to understand the risk and thus, underwrite the risk.

The remainder of section 21 limits the duty of disclosure. Section 21(2) specifies that the duty does not require the disclosure of a matter:

that diminishes the risk;
that is of common knowledge;
that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
as to which compliance of the duty of disclosure is waived by the insurer.

Section 21(3) states that where the insured fails to answer or gives an obviously incomplete or irrelevant answer to a question included in a proposal form, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter. Accordingly, it is of some importance for underwriters to ensure that they are satisfied that a proposal form has been adequately completed prior to offering terms.

Misrepresentation

Section 23 to 27 of the Act concern pre-policy misrepresentations by insureds (the making of which would constitute a breach of the duty of disclosure). The contents of the division largely mirror those of the preceding division concerned with the duty of disclosure. However, of particular interest is section 26 which specifies that certain statements are not in fact misrepresentations:

untrue statements made on the basis of a reasonable belief as to the content of such statements; and
statements are not misrepresentations unless it is known (or a reasonable person in the circumstances would have known) the statement would be relevant to the insurer's decision to accept the risk and, if so, on what terms.
Once again, the reasonable person test is to be applied. It is also interesting to note that the truth or otherwise of the statement is not necessarily determinative.

Remedies

The Act provides different remedies depending on whether the focus is general insurance or life insurance but, for the purpose of this paper we shall focus only on the general insurance side of things.

Section 28 of the Act sets out the remedies for non disclosure/misrepresentation in relation to an application for general insurance.

Section 28(1) states that a remedy is available where the insured has at pre policy, failed to comply with the duty of disclosure or made a misrepresentation, but no remedy is available to the insurer if that insurer would have entered into the contract of insurance on the same terms and for the same premium regardless of the non disclosure or misrepresentation. That means that the non-disclosure or misrepresentation has to have been of a nature that had the insurer been aware of it in the first place that they would have declined to provide the cover.

Section 28(2) states if the non disclosure or misrepresentation was fraudulent, the insurer may avoid the contract. The Act is silent as to the meaning of "fraudulent", however the case law establishes that the insured must have deliberately concealed information from the insurer and/or lacked an honest belief as to the representations it made. Reckless indifference as to the truth or otherwise of the representations may be sufficient, but mere carelessness is not.

Even if fraud is established, section 31 of the Act permits a Court to disregard the avoidance if it would be harsh and unfair to allow the insurer to so avoid. While the Act is silent on the issue, the common law suggests where fraud has been established, the insurer is not obliged to refund the premium paid.

Section 28(3) of the Act deals with a situation where there has been an innocent non-disclosure or misrepresentation, or an insurer has elected not to avoid the contract (despite being entitled to do so). It provides that the insurer may not avoid the contract, but may reduce its liability to an amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation not been made. In some circumstances, the insurer may be entitled to reduce its liability to nil but, at all times, the insurer will bear the burden of proof. The insurer may even be able to charge the insured an additional premium and interest on that premium so as to put it in the same position that it would have been had it accepted the risk in the first place if a higher premium was applicable.

Section 29, like section 28, provides different remedies depending on whether or not the non-disclosure or misrepresentation was fraudulent. If fraudulent, the insurer may avoid the contract. If not fraudulent, and the insurer would not otherwise have entered into the contract, the insurer may avoid the contract within three years of its inception. Alternatively, the insurer may within three years vary the contract by amending the sum insured according to a formula prescribed by the Act section 29(4).

Section 29, like section 28, provides different remedies depending on whether or not the non-disclosure or misrepresentation was fraudulent. If fraudulent, the insurer may avoid the contract. If not fraudulent, and the insurer would not otherwise have entered into the contract, the insurer may avoid the contract within three years of its inception. Alternatively, the insurer may within three years vary the contract by amending the sum insured according to a formula prescribed by the Act (section 29(4)).

Case examples

The effect of non-disclosure, misrepresentation and fraudulent non-disclosure:

1.	Lindsay v CIC Insurance Limited (1989) 16 NSWLR 673
	In this case, Rogers CJ in the Commercial Division of the Supreme Court, considered circumstances in which an insurer's liability can be reduced to nil for non-disclosure of relevant facts by an insured. The plaintiffs (Lindsay) were the owners of premises, along with 13 other persons. The property was managed by W T Newey & Co Real Estate Agents. The insurance arrangements were handled by Peake Insurance Brokers Limited. On 2 October 1987 the defendant (CIC) issued a cover note in respect of the premises. The premises consisted of shops on the ground floor with 2 offices on the first floor. In 1981 the offices were leased by Mr Mark Newey on behalf of the owners to Mr George Versi. Mr Versi told Mr Newey that he was a carpenter and builder and wanted to use the premises as a general of. ce. On 19 October 1987 the premises were badly damaged by fire. Following the fire the premises were inspected by Detective Sergeant Horn and Mr Keech a private investigator acting for the defendant. The remains of the items found in the offices included a double and single bed, a number of chairs, bar stools, a sofa and a shower stall. There was also damaged lingerie, lace panties, part of a packet marked 'edible condoms', the remains of a rubber dildo and scented oils. There were also a number of newspapers carrying advertisements under 'swingers' purporting to be from females and indicating their availability for entertainment of a sexual nature for reward. The conclusion drawn by the court was that the premises were used by Mr Versi at the very least as an introduction agency for persons wishing to meet females for sexual purposes for reward and most probably the premises were used as a brothel. That the premises were used in this fashion was not disclosed to the defendant insurer. This was the reason for the defendant declining indemnity for the damage caused by the fire. The next issue dealt with by the court was whether the nature of the use of the premises was 'known' to the plaintiffs within the meaning of Section 21 of the Insurance Contracts Act 1984. Evidence was adduced during the trial which led to the conclusion by Rogers CJ that Mr Newey, the managing estate agent, saw and heard enough from other tenants to conclude that the offices let to Mr Versi were utilized in 1986 for the purpose of males having intercourse with one and perhaps two females. This then left the question of Mr Lindsay's knowledge. It was accepted by the other 13 owner/plaintiffs that if Mr Lindsay had the necessary knowledge, that was knowledge of all the plaintiffs. From the evidence the trial judge concluded that Mr Newey was aware of the use to which the premises were being put and that in the judge's opinion Mr Newey would have and did disclose that to Mr Lindsay. The court then considered the hypothetical question of whether Mr Newey knew of the use of the premises but, he did not disclose this to Mr Lindsay. Should this be held to be knowledge of the plaintiffs for the purposes of Section 21(1) of the Act. There is nothing in the Act itself which indicates one way or the other whether the knowledge, which is required by Section 21, is actual knowledge or whether knowledge of the agent is sufficient. The accepted principles of statutory interpretation mean that the Act is to be given a purposive interpretation. His Honour expressed the view that the matter required to be disclosed is what is 'known' either to the proponent personally, or to a relevant agent of the proponent. His Honour then cited an example where all matters relating to insurance were delegated by the proponent to an employee. The proponent is not involved in any way with the effecting of the insurance. The employee knows facts calling for disclosure. The proponent does not. Surely it could not be accepted that the proponent is relieved from disclosing, through the employee, relevant matters concerning risk and known to the employee. To hold otherwise, in the judge's opinion, would defeat the whole principle upon which the edifice of full disclosure is structured. The duty of disclosure should be measured by what facts the insured knew or which a reasonable person in the insured's circumstances would have known to be relevant to the insurer's assessment of the risk. The court concluded the managing agent of a block of shops and offices is an agent. His knowledge of matters relating to the property which impact on the insurance risk ought to be imputed to the owners. By delegating the management of the property to an agent, the owners cannot avoid having knowledge of the matters which might result in a proposal being refused or a higher premium being imposed. Therefore, even if Mr Newey did not inform Mr Lindsay of the use to which the premises were being put, Mr Newey's knowledge must be imputed to Mr Lindsay for the purposes of Section 21(1). The next issue considered by the court was whether this was the type of matter which should have been disclosed to the insurer. It was concluded that a reasonable person in the plaintiffs position would be expected to know that the purpose for which the premises were being used was relevant. Particularly given that the nature of the business was such that the use could place the premises in danger. Arson, standover tactics, fights, dissatisfied customers, would all be dangers attendant on the conduct of a brothel and in turn would place the safety of the premises at risk. There was no suggestion that the non-disclosure was fraudulent on the part of the plaintiffs. The defendant was seeking the remedy provided under Section 28(3) of the Act. Evidence was given at the trial by the defendant that had they known the purpose to which the premises was used that cover would have been declined. This was due to the low ethical standards of the persons using the premises, the higher risk of violence, the increased security risks, the unethical actions of potential competitors and that basically cover would have also been declined on a commercial basis. The intention of the legislature of Section 28(3) is to put the insurer in a position it would have been in if the relevant disclosure had been made. If, in those circumstances, the insurer would not have accepted the policy, then the only way in which the insurer can be restored to the position that it would have been in is by reducing the payment required to be made under the policy to be nil. In this particular case his Honour was satisfied that the evidence disclosed that the insurer would not have entered into the policy had there been disclosure of the use to which Mr Versi put offices. The amount payable on the policy would be reduced to nil. The insurer would have to reimburse the plaintiffs their premium payment as the insurer would not be entitled to any redress which exceeds the loss which it has in fact suffered. The main issues decided in this case being the knowledge of a managing agent being sufficient knowledge pursuant to section 21 of the Act and reducing an insurer's liability to nil has since been applied in FAI General Insurance Co Ltd v Henry Rae & Court (1993) 10WAR 322 and Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989)97 FLR 284. Comment: Insured's have to be vigilant in ascertaining factors which must be disclosed to the insurer.

2.	McCabe v Royal & Sun Alliance Life Assurance Australia Ltd (2003) WASCA 162
	In this case, the Court of Appeal considered the duty to disclose in the case of a progressive illness. Mrs McCabe suffered from systemic lupus erythematosis (SLE). In October 1997 Royal & Sun Alliance Life Assurance Australia Limited invited Mrs McCabe to apply for life insurance. She received a brochure that detailed her duty to disclose any matter material to the formation of the insurance contract. Mrs McCabe applied for the life insurance and Royal & Sun applied for a medical report from her general practitioner. The report did not expressly refer to SLE but was in such terms that the trial judge held that it complied with the duty to disclose SLE. Whilst hospitalised for an exacerbation of her SLE on 26 February 1998 Mrs McCabe was advised that her application was accepted at a monthly premium which was increased by 75% of the standard premium. Instead of accepting the contract straight away Mrs McCabe applied to AMP for life insurance, disclosing that she suffered from SLE and the application was subsequently refused. Mrs McCabe then accepted the offer from Royal & Sun. Mrs McCabe died on 5 June 1998 from complications from SLE. A claim was made on the life insurance by her husband. Royal & Sun denied the claim on the grounds that Mrs McCabe had breached her duty to disclose under Section 21 of the Act because prior to entering the contract she failed to disclose that she had been hospitalised for SLE and had been refused life insurance from AMP. The trial judge found the Mrs McCabe had breached her duty. The executors of Mrs McCabe's estate appealed to the Court of Appeal. There were two issues which were to be considered on appeal. The .first was whether Mrs McCabe knew or ought to have known that her hospitalization for SLE and the rejection of life insurance by AMP would have been relevant to Royal & Sun's decision to accept the risk. Secondly, whether Royal & Sun would have entered the contract if it had known the undisclosed facts. Justice Murray of the Western Australian Court of Appeal found that Mrs McCabe knew of the nature of her disease and that it had worsened to such an extent as to require hospitalsation. She ought to reasonably have known that Royal & Sun would have wanted to know that her disease was in such a crisis state. Further, she knew that AMP's decision to refuse insurance was due to her SLE and ought to have known that that refusal was relevant to Royal & Sun's decision to proceed with its insurance. The timing of Mrs McCabe's acceptance of the offer at the higher premium rate was also commented upon as suggesting that she thought it prudent to take up the offer. Evidence was adduced during the trial which satisfied the bench that Royal & Sun would not have accepted Mrs McCabe's insurance had it known of the undisclosed facts. The appeal was dismissed. Comment This case is an example of when a court will find that an insured has failed to disclose material facts when applying for life insurance. It is not enough that an insured discloses that he or she is suffering from a particular disease or illness. When there are specific matters that would indicate concern as to the extent of the disease this must also be disclosed to the insurer.

3.	QBE Mercantile Mutual Limited and Hammer Waste Pty Limited (2003) NSW CA 356
	This case relates to the duty of disclosure by the insured at the time of renewal of the policy. In July 2001, QBE Mercantile Mutual Limited ("QBE") agreed to renew its policy of a heavy haulage motor vehicle cover for the insured, Hammer Waste Pty Limited ("Hammer"), a garbage truck business used in the business of garbage collection. The vehicle was classed heavy rigid. The insurance cover was arranged by insurance broker OAMPS Insurance Brokers ("OAMPS"). On 21 August 2001, the truck was being driven by a person known as Mr Winstanley and was involved in a serious accident as a result of which two people were killed, the vehicle was severely damaged and considerable damage was done to other vehicles. Hammer notified QBE of a claim under the policy. QBE denied the claim on the ground that Mr Winstanley had been "rejected" as a driver under the policy because he was outside QBE underwriting selection criteria as he had only two months driving experience in vehicles of the class in question. Hammer commenced proceedings against QBE seeking a declaration that QBE was liable to indemnify it in respect of claims arising from the accident as well as a claim for damages for breach of contract. Hammer claimed, in the alternative, that OAMPS had breached its duty of care in failing to advise of the rejection of Mr Winstanley's drivers declaration. The trial judge found that prior to the accident, Hammer was never informed that Mr Winstanley had been rejected as a driver by QBE. It was held that, pursuant to section 21, there was no duty to disclose because Hammer lacked the requisite knowledge. The NSW Court of Appeal dismissed the appeal with costs and held that: Mr Winstanley was not excluded by the policy, rather, if a drivers declaration was not accepted, for whatever reason, there was only one consequence - a $1,000 excess. The obligation of the insured is confined to the particular risk insured, and if the risk in respect of which a claim is made against the insurer differs from the risk it has insured, it is not liable to make good that claim. The risk covered, in this instance, was the chance of the loss, damage or theft of the vehicle as described in the schedule of the policy and the chance of third party liability as described in the schedule of the policy. There is no alteration of the risk where an alteration, upon the true construction of the policy, might be taken to have been within the contemplation of the parties at the time the contract was entered into. Nor is there any alteration of the risk where the alteration does not effect the description of the policy, even though it increases the danger of loss. There was no duty imposed by section 21 or otherwise upon Hammer to make the disclosure claimed. Mr Winstanley's experience was not relevant to the policy to be renewed and was not the subject of any express requirement by the appellant to provide such information. Hammer, or a reasonable person in the circumstances, having already informed QBE of the name of its driver, would not be expected to know, when renewing the policy, that the fact that Mr Winstanley continued to be its driver, was a matter relevant to QBE's decision whether to accept the risk. The knowledge of QBE consisted of an unjustified. Belief that the policy did not cover a vehicle driven by Mr Winstanley. This was entirely QBEs error and the respondents did not cause this misunderstanding.

TYPICAL POLICY CONTRACT EXAMPLE OF "DUTY OF DICLOSURE" WORDING

Note: The following example is only meant as an indication of a typical wording. Each insurer has their own "duty of disclosure" wordings and obligations thus, you should ensure that you pay particular attention to the duty of disclosure, which concerns any insurance policy you take out.

"Before you enter into a contract of insurance with an insurer, you have a duty, under the Insurance Contracts Act to disclose to the insurer every matter that you know, or could reasonably be expected to know, is relevant to the insurer's decision whether to accept the risk for insurance and if so, on what terms. You have the same duty to disclose these matters to the insurer before you renew, extend, vary or reinstate a contract of insurance.

A contract of insurance is a contract based on the utmost good faith, requiring each party to act towards the other party with the utmost good faith. You must disclose to us, facts known to you which are material to our consideration of your insurance risk.

You must be fully frank and honest and not disguise or leave out information you know of, or suspect, that we rely on to base our decision whether or not to insure you. Leaving out pertinent information is misrepresenting your risk, which could have the effect of voiding all your cover under this Policy. It does not matter whether or not the insurance risk is intentionally or unintentionally misrepresented, as either circumstance will void the insurance cover.

Your duty however does not require disclosure of any matter;

	-	that diminishes the risk to be undertaken by the insurer;
	-	that is of common knowledge; and
	-	that the insurer knows, or ought to know;

If you fail to comply with your duty of disclosure, or misrepresent your insurance risk to us, we will be entitled to reduce our liability in respect of a claim or may cancel the contract. If your non-disclosure or similar act is fraudulent, we may also have the option of avoiding this insurance contract from its inception."

(click here for a copy of the Insurance Contracts Act)