The Supreme Court of New South Wales recently considered whether an insurer was entitled to deny indemnity to an insured on the grounds of non-disclosure and misrepresentation in the policy proposal form completed on behalf of the insured hotel.
The decision provides useful guidance for insurers regarding the need to ensure:
- questions in proposal forms can be clearly understood by prospective insureds;
- proposal forms make clear that the information sought is relevant to the insurer’s decision to accept the risk and if so, on what terms;
- further information is sought from the prospective insured in respect of incomplete answers; and
- they have clearly recorded processes and procedures demonstrating that cover would have been denied if the disputed information had been disclosed in a proposal form.
A hotel patron suffered spinal injuries causing paraplegia when he fell down the stairs to the basement of the Civic Hotel in Sydney on 16 February 2011. He commenced proceedings against the occupiers and licensees of the hotel.
The hotel’s liability insurers denied indemnity on the grounds that there were non-disclosures or misrepresentations on the policy renewal form which, if known to the insurer would have caused it to decline renewal of the policy.
The Civic Hotel was a licensed hotel with a restaurant and bar on the top floor, public bar and gaming area on the ground floor and a basement with a bar that could be used to provide entertainment for patrons or as a separate function room. The room had a sunken dance floor and a console for a disc jockey and could host live bands.
The hotel had been insured up to 31 January 2011. On 25 January 2011, the hotel’s broker submitted a renewal questionnaire to ASR Underwriting Agencies (ASR), Neon Underwriting’s (Neon) Australian agent. The form contained a series of yes/no boxes dealing with whether the hotel had childminding facilities, dancing, live entertainment, discos, a cover charge and a nightclub.
The liability policy wording defined ‘nightclub’ as premises licensed as such or premises “not licensed as a nightclub but where dancing is regularly undertaken and the venue is arranged in such a manner as to offer permanent dancing and musical entertainment”. The definition also noted that any venue would be excluded from cover under the policy if it conducted three or more activities such as charging an entrance fee, employing security personnel to manage entrance to the dance premises, had special lighting, was marketed as a nightclub, has a permanent sound system and having soundproofing.
The hotel’s licensee, completed the renewal form and noted that the premises had a dance floor and occasional dancing and live entertainment but responded ‘no’ to questions asking whether there was a disco, cover charge or nightclub. The licensee also wrote “DJ and cabaret” in response to a question asking what entertainment was provided by the hotel.
ASR’s liability underwriter forwarded the completed questionnaire to the relevant Lloyd’s syndicate broker on 27 January 2011 with information regarding the location and cover sought, suggesting cover for a premium of $5,500 and the comment “Can you please refer to underwriters.”
The Lloyd’s broker responded the next day and confirmed that Neon agreed to the proposed renewal terms.
The liability underwriter then provided the material to ASR’s senior liability and property underwriter, who signed the renewal summary. On 28 January 2011, the underwriter emailed a quotation for renewal terms to the hotel’s insurance broker. The hotel’s broker requested renewal on 31 January 2011 and cover was approved that day.
The Court noted the following relevant matters:
- the binding authority agreement between Neon and ASR required declinature of any risk that did not have satisfactory answers to any questions on the proposal form;
- the binding authority agreement also required referral to underwriters before binding of any venue with a dance floor exceeding 20m²;
- the policy wording provided that Neon may agree not to exclude nightclubs from coverage if they were provided with full details and an additional premium was paid to cover the activities;
- in cross-examination, the senior underwriter conceded that for a renewal which had been approved by underwriters, he would be inclined to sign off on the proposal; and
- the senior underwriter also conceded that no questions were raised with regard to the answer “DJ and cabaret” in response to the question in the proposal form relating to live entertainment.
The Court found that the hotel was entitled to indemnity under the policy because:
- it was not satisfied there had been a misrepresentation regarding ‘nightclub’, ‘disco’ or ‘frequent dancing’ in the renewal proposal. Any duty of disclosure relating to the dance floor was effectively waived under section 21(3) of the Insurance Contracts Act 1984 (Cth) (ICA) because the answer was obviously incomplete (as it did not specify the area of the dance floor) and ASR and Neon did not pursue the matter with the insured;
- there was a similar absence of information in the initial proposal which did not appear to have been followed up;
- the definition of ‘nightclub’ in the policy documents was “bizarre” and confusing and the potential questions arising from the vague definition were “almost endless”;
- section 26 of the ICA protected the insured as a reasonable person would have concluded there was no nightclub on the premises in view of the mixed use of the hotel, the varying use of the basement and the confusing definition and status of the term ‘nightclub’ in the policy documents; and
- the Court was not satisfied that the hotel licensee or a reasonable person in his position could be expected to know that the matters in issue would be relevant to the insurer’s decision to offer coverage or the terms of such coverage.
A decision to deny indemnity to an insured on the basis of non-disclosure or misrepresentation is a serious step, especially in view of the protection afforded to insureds by the ICA. The decision is a reminder to insurers that, before declining indemnity, they need to consider the following matters:
- did the questions seeking the information which is the subject of the alleged non-disclosure or misrepresentation make clear what information was being sought? – confusing wording or definitions will make it harder to persuade a court that there was a non-disclosure or misrepresentation. For example, in the case of pleasure craft insurance, questions dealing with modifications to the vessel should specify areas of the vessel that are relevant to the decision whether to accept the risk (eg engines, keels, rigging) rather than asking a general question about modifications;
- how did it respond to the alleged non-disclosure or misrepresentation? – if no further information was sought from the insured in respect of the alleged non-disclosure, there is a risk the insurer will be found to have waived compliance with the duty of disclosure;
- can it demonstrate that, had the information been disclosed by the insured, cover would have been declined or offered on different terms? – underwriting guidelines and evidence of declinatures in similar circumstances (with confidential information redacted) will likely need to be put into evidence; and
- have there been other occasions when it has issued policies despite such information being disclosed by a prospective insured? – if so, it will be difficult to persuade the Court that a declinature was inevitable if the information had been disclosed.
This article was written by Anthony Highfield, Partner and James McIntyre, Special Counsel.