The Insured’s Duty of Disclosure

Legge v Universal Hospitality Group Pty Ltd & Ors (No. 3) [2022] NSWSC 709

When will an insurer fail to maintain a denial of indemnity on the basis of an insured’s breach of its duty of disclosure?

According to this decision of the Supreme Court of New South Wales, where an insurer: 

  1. Fails to define important terms and phrases used in its proposal form, renewal form and policy;
  2. Has underwriters concede under cross examination that cover would not have been refused, had disclosure been comprehensive;
  3. Fails to clarify incomplete answers by an insured in a proposal or renewal; 
  4. Fails to demonstrate compliance with underwriting guidelines;
  5. Fails to consider the understanding of the insured at the time information is provided;
  6. Adopts a lawyerly hindsight analysis. 

Background

In February 2011, Mr Legge fell down stairs whilst walking to a basement bathroom at the Civic Hotel public bar (the venue).  He sustained spinal injuries causing paraplegia.

In July 2014, Mr Legge commenced legal proceedings against Universal and Mr Kospetas, the occupiers and licensees of the venue.

Universal had a public liability insurance policy at the time of Mr Legge’s fall.  However, insurance cover was refused by the Insurer to Universal in respect of Mr Legge’s claim.

The Insurer denied indemnity to Universal because there were alleged failures by Mr Kospetas to disclose relevant matters and/or there were misrepresentations of relevant matters on the Insurer’s Renewal Form (the Renewal).

Specifically, the Insurer argued Mr Kospetas failed to identify part of the venue was a “nightclub” and, as a result, the Insurer would not have agreed to insure a “nightclub”.

The Parties' Arguments

The Insurer argued Mr Kospetas had a duty to disclose relevant matters so the Insurer could know whether or not to offer insurance to Universal and, if so, on what terms.

The Insurer alleged there were misrepresentations in the Renewal completed by Mr Kospetas which specifically asked certain questions directed to risk, and those questions were not properly answered.

As a result, the Insurer maintained Universal breached its duty of disclosure under section 21 of the Insurance Contracts Act 1984 (Cth) (the ICA) and/or made a misrepresentation within the meaning of section 28 of the ICA. As a result, the Insurer was entitled to avoid the policy of insurance or reduce its liability under the policy.

Mr Kospetas and Universal denied they misrepresented the situation, pointing to faults and ambiguities in the Renewal.

Additionally, Mr Kospetas and Universal disputed that the Insurer would have refused insurance, even if Universal had disclosed all the matters the Insurer alleges it did not sufficiently disclose.

The Insurance Renewal Form

The venue included a basement with seating, dance floor and a console for a disc jockey, ground floor public bar and gaming area and a top floor restaurant and bar.

Mr Kospetas told the court he ticked “no” to the question in the Renewal “Do you have…Nightclub” because the venue was not a nightclub.  “It was a licensed hotel,” he told the court.

Additionally, responses provided by Mr Kospetas on the Renewal indicated there was a dancefloor, but a box asking its size was left empty.  This incomplete answer was not subject to follow up inquiry by the Insurer before the policy was renewed.

Justice Lonergan’s judgment considered various aspects of the Renewal, including but not limited to, the manner in which questions were asked of a customer, the amount of information sought from a customer and the definitions of key terms contained in the Policy.

Her Honour found the definition of “nightclub” in the Policy “is bizarre and blurs concepts in a way that introduces confusion”.

She stated: 

“What, for example, comprises “permanent dancing”? Should “permanent dancing and musical entertainment” be considered together? What is meant by “the venue”? What is meant by “premises” in the context of the exclusion? What is meant by “special lighting”? (particularly where, as Mr Kospetas noted, the top floor had “mood lighting”)? How should the indicia be interpreted when the whole premises was monitored by security guards? The potential questions arising from the vagaries of expression in the “nightclub” definition are almost endless”.

The Alleged breaches of sections 21 and 28 Insurance Contracts Act 1984 (Cth)

After considering Mr Kospetas’ evidence, Justice Lonergan found his belief there was no “nightclub” was genuinely held by him, with valid reason. 

She accepted a reasonable person in Mr Kospetas’ circumstances would have held the same view, given the mixed use of the venue, the varying use of the basement depending on the night of the week and what, if anything, was booked to occur there, and the clumsy and confusing “definition” and status of “Nightclub” in the Policy documents.

Her Honour found there been no relevant misrepresentation regarding “disco” or “frequent dancing”. Additionally, any duty of disclosure relating to “dance floor” was waived under s 21(3) ICA because that answer was incomplete, but the Insurer did nothing to pursue that line of enquiry.

Justice Lonergan did not believe Mr Kospetas, or a reasonable person in his position, could be expected to know the assertions in issue would be relevant to the Insurer and its decision to cover the premises at all, or to issue cover on terms.

The Insurer’s alleged refusal to insure

Justice Lonergan said the Insurer, at trial, did not make it clear what would occurred if the dance floor specifications had been given, or there had been a “yes” tick to the nightclub question.

Her Honour stated the Insurer “has not persuaded me that it would have refused to insure the premises” and “[t]he evidence on that issue was contradictory and in respect of the evidence of the underwriters, incomplete and unsatisfactory”.

Considerations

Justice Lonergan found Mr Kospetas presented as an honest businessman who did his best when completing the Renewal to describe the venue and the venue’s activities, based on his understanding of the range and spread of functions in the three storey multi-use hotel.

When making disclosure to an insurer before buying, or renewing, a policy of insurance, it is important to be honest and genuinely answer all questions asked by the insurer.

Justice Lonergan did not accept the Insurer’s analysis of the claim. Her Honour was critical of the Insurer’s lawyerly hindsight analysis” which sought to “seize on indicia and events and marry them up with a forensic focus”. 

Therefore, if an insurer challenges a claim based upon a customer’s disclosure, it is important to assess that disclosure from the customer’s perspective at the time the policy was purchased, rather than from the insurer’s perspective at the time the claim is being made.

Important note

This article is not legal advice. If you require legal advice about your particular circumstances, contact us.

To find out more about Denning Insurance Law, click here