Burning down the house: Underwriting evidence required to establish a fraud defence

12 April 2016

Kalabakas v Chubb Insurance Company of Australia Ltd [2015] VSC 705

Clear underwriting guidelines and thorough preparation of underwriter testimony were key to establishing defences of fraudulent non-disclosure and fraudulent misrepresentation.

Background

The insured purchased a property, upon which was constructed a substantial home, in late 2010. The insured proceeded to insure the property in December 2010 and renewed coverage in December 2011. In July 2012 the dwelling and contents of the property were damaged by fire. Following investigation of the circumstances surrounding the original construction and sale of the property and the condition of the property at the time of the fire, the insurer avoided the renewed policy on the basis of fraudulent misrepresentations and non-disclosures by the insured.

Defences

Declining a claim on the basis of fraudulent misrepresentation pursuant to s 28(2) of the Insurance Contracts Act (Cth) (ICA) or breach of duty of disclosure under s 21(1) of the ICA, due to the seriousness and completeness of the defence, necessitates a high burden of proof. To satisfy this, clear underwriting guidelines and thorough preparation of underwriter testimony were key evidence establishing these defences in this case.

Section 21 of the ICA requires an insured to disclose to the insurer “every matter that is known to the insured”, specifically those that the insured either knows are relevant, or that a reasonable person in the circumstances “could be expected to know to be a matter so relevant”. This is in turn viewed through the lens of the type of insurance coverage sought.

Section 28 of the ICA applies where either:

  • an insured has failed to comply with their duty of disclosure; or
  • made a misrepresentation to the insurer before the contract was entered into.

If such a failure to disclose or misrepresentation would not have prevented the insurer from entering into the contract (i.e. where the insured would have received coverage regardless of the disclosure) section 28 has no effect. If the failure was fraudulent, or the misrepresentation was made fraudulently, then section 28 allows the insurer to avoid the contract entirely. If the insurer would have provided coverage on lesser terms, then the insurer’s liability is reduced to what it would have been if the failure or misrepresentation had not occurred.

Burden of proof

In Advance (NSW) Insurance Agencies Pty Ltd v Matthews Young J held that:

Although there is no definition of fraudulent conduct in the Act, one applies the usual view of the word, that is it means acting deliberately or recklessly.1

In cases where fraud is alleged, the onus of proof was succinctly addressed by Emmett J (as his Honour then was) in Warner v Hung, in the matter of Bellpac Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (No 2):

the Court must feel an actual persuasion of the occurrence or existence of that fact before it can be found… The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, and the gravity of the consequences flowing from a particular finding are considerations that must affect whether the fact has been proved to the reasonable satisfaction of the Court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony or indirect inferences.2

The duty of disclosure, as codified in s 21 of the ICA, applies to matters that are ‘known’ by the person seeking to be insured that would be relevant to the insurer assessing risk before entering into a contract of insurance. At first instance, in Permanent Trustee Australia v FAI General Insurance Co Ltd, Hodgson CJ in Equity defined the concept of knowledge relevant to the provision:

‘known’ in s 21(1) means more than suspected or believed. What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term ‘known’.3

Fraud related defences carry a high onus of proof on the part of the insurer and the evidence must be clear and cogent. The Court must be satisfied that the insured deliberately gave a false account of matters relevant to the insurer’s pre-contractual assessment of risk.4

Underwriting evidence

An inherent complication with underwriting evidence is the contextual basis of the underwriting process. For example, in this matter the underwriting guidelines referred to “minor” and “major” works to which there were no definitions provided within the guidelines themselves. This allowed underwriters properly to maintain professional judgment and discretion in insuring various risks, as a codification of all allowable risks into a single document would not be practicable. In such circumstances, the oral and written evidence and testimony of underwriters is crucial. In establishing fraudulent misrepresentation or failure to disclose the evidence of the relevant underwriters in particular is essential.

To assist the underwriters in this matter, each were provided with a document of ‘assumed facts’, to assume the matters which were alleged by Chubb in its defence were known to the insured and disclosed at the time of entry into the Initial Policy or the Renewed Policy. On the basis of this statement of assumed facts, each underwriter gave a witness statement addressing, by reference to the underwriter’s individual knowledge and expertise and the underwriting guidelines:

  • Whether any or all of the assumed facts were disclosed to Chubb;
  • Whether any or all of the assumed facts were relevant to Chubb’s decision to insure; and
  • Whether Chubb would have insured the property had any or all of the assumed facts been disclosed, whether at inception or renewal of the policy.

The statement of assumed facts was important in establishing a context and factual basis to support Chubb’s defence, and the fact that had the matters been disclosed then it would not have entered into a contract of insurance with the insured. The context provided by the assumed facts must be supported by consultations of the individual underwriters with the underwriting guidelines, and a demonstrable record keeping process to this effect.

Ultimately, on the basis of the underwriting evidence McMillan J was satisfied that the insurer would have referred to the underwriting guidelines when determining whether to cover the risk and that the misrepresentations of the insured would have resulted in the insurer declining to cover the risk, regardless of whether the representations were made fraudulently or not. Further, McMillan J was satisfied, on the basis of the documentary evidence of the insurer as compared to the largely oral evidence of the insured, that the insured’s representations were deliberate misrepresentations, or alternatively reckless misrepresentations. Accordingly, the judge was satisfied that the representations were fraudulent to the satisfaction of section 28(2) of the ICA.

This article was written by David Frew, Solicitor and Michael Bowyer, Partner.


1(1987) 4 ANZ Ins Cas 60-813 at 74-995. Young J was there discussing making a misrepresentation fraudulently, however the standard of recklessness has also been accepted as applicable to non-disclosure, see Tyndall Life Insurance Co Ltd v Chisholm (2000) 11 ANZ Ins Cas 90-104 (Debelle J).
2Warner v Hung, in the matter of Bellpac Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (No 2) (2011) 297 ALR 56 [48].
3Permanent Trustee Australia v FAI General Insurance Co Ltd (1998) 44 NSWLR 186, 247.
4Poole v Chubb Insurance Company of Australia Ltd [2014] NSWSC 1832 (19 December 2014) [91] (Stevenson J).

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