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District Court 17 December 2020

The Owners – Strata Plan No 55682 v W. R. Berkley Insurance (Europe), PLC & Ors

[2020] NSWDC 758

Fraud & dishonesty
INSURANCE PROPERTY DAMAGED BY FIRE MATERIALITY OF NON DISCLOSURE OF OCCU PATION BY OMCG NEGLIGENCE CAUSATION

Citation: The Owners – Strata Plan No 55682 v W. R. Berkley Insurance (Europe), PLC & Ors [2020] NSWDC 758
Court: District Court of New South Wales
Date: 17 December 2020
Judge: Abadee DCJ

Background

A fire broke out in February 2014 at a four-unit apartment block in Byron Bay managed by a strata owners corporation (the Insured). The Property was covered by a commercial strata insurance policy for the period April 2013 to April 2014. After the fire, the insurer declined indemnity on the basis that the Insured had breached its statutory duty of disclosure under the Insurance Contracts Act 1984 (Cth) by failing to disclose that one of the units had been leased to and occupied by the Nomads Motorcycle Club (NMC), a declared outlaw motorcycle gang (OMCG), and used as its clubhouse.

The Insured had obtained the policy through insurance brokers (HHIA Pty Ltd and two of its directors). The proposal form described the unit's occupation as an "office." The central factual dispute was whether the brokers had in fact disclosed the NMC occupancy to the insurer's underwriting agent during a telephone conversation in April 2013, shortly before the policy was bound.

The litigation involved four sets of proceedings running together: the Insured's claim against the insurer for indemnity under the policy; an alternative negligence claim against the brokers if the insurer's declinature was upheld; the brokers' proportionate liability arguments; and the insurer's contingent cross-claim against its underwriting agent.

  • Whether the broker disclosed the NMC's occupancy of the unit to the insurer's underwriting agent prior to the policy being entered into
  • Whether the NMC occupancy was a material fact requiring disclosure under s 21 of the Insurance Contracts Act 1984 (Cth), such that the insurer was entitled to reduce its liability to nil
  • Whether the brokers breached their duty of care by failing to disclose the NMC occupancy to the insurer, and/or by failing to advise the Insured of the risk of an unenforceable policy
  • Whether the brokers' failure to advise on alternative insurance options contributed to the Insured's loss
  • Causation and quantum of loss, including whether the Insured could claim on behalf of individual lot owners for loss of rent
  • Whether proportionate liability applied, and who qualified as concurrent wrongdoers
  • Whether the insurer's cross-claim against its underwriting agent was statute-barred, and whether fraudulent concealment under s 55 of the Limitation Act 1969 (NSW) extended the limitation period
  • Whether a conventional estoppel precluded the underwriting agent from relying on a limitation defence

Decision

Was the NMC occupancy disclosed to the underwriter?

The court found, after a detailed and unfavourable credit assessment of the broker Mr Hynes, that the NMC occupancy was not disclosed to the insurer's underwriting agent before the policy was bound. The court preferred the evidence of the underwriter, Ms Holmes, whose account was consistent with the contemporary documentary record. Mr Hynes gave multiple inconsistent accounts across three affidavits and his oral evidence, and the court found his credit significantly damaged.

Materiality and the insurer's right to reduce liability

The court held that the NMC's occupation of a tenancy as an OMCG clubhouse was plainly a material fact for the purposes of s 21 of the Insurance Contracts Act. A prudent insurer would have regarded it as relevant to the decision whether to accept the risk. The insurer was therefore entitled to decline indemnity, and the Insured's claim against the insurer failed.

Negligence claim against the brokers

The court found that the brokers owed and breached a duty of care. The brokers knew of the NMC occupancy by at least April 2012 but failed to disclose it to the insurer or to advise the Insured of the risk of obtaining an unenforceable policy. The brokers also failed to advise the Insured of alternative options for obtaining cover. The court found factual causation established: had the brokers acted appropriately, the Insured would either have obtained enforceable cover or been placed in an informed position to seek alternative arrangements.

Damages, proportionate liability, and the cross-claim

The court assessed damages against the brokers on the basis of the value of the lost indemnity, being the cost of rebuilding and repair. The Insured's claim on behalf of individual lot owners for lost rent was examined by reference to the policy terms and the standing of the owners corporation to assert that loss. On the insurer's cross-claim against its underwriting agent, the court considered the limitation defence and rejected arguments that s 55 of the Limitation Act applied to extend time by reason of fraudulent concealment, and also rejected the conventional estoppel argument. Certain heads of the cross-claim were found to be statute-barred.

Orders Made

The court directed the parties to bring in short minutes of order by 22 January 2021 to give effect to the reasons, dealing with interest and costs. If agreement could not be reached, the following timetable applied:

  • The plaintiff, first and fourth defendants, and cross-defendant to file submissions (maximum 5 pages) by 22 January 2021
  • The second and third defendants to file submissions in response (maximum 5 pages) by 29 January 2021
  • Reply submissions (maximum 3 pages) by 2 February 2021
  • Final dispositive orders to be made by the judge in chambers on the papers

Key Takeaways

  • The District Court confirmed that occupation of a strata unit by an outlaw motorcycle gang as its clubhouse is, as a matter of common knowledge and materiality, a fact that a prudent insurer would regard as relevant to the acceptance of a risk, engaging the insured's duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth).

  • Where an insurer establishes non-disclosure of a material fact, it may be entitled to reduce its liability to nil under s 28 of the Act, and a claim for indemnity will fail accordingly.

  • A broker who knows of an unusual or high-risk occupancy in a strata building has a duty not merely to disclose that fact to the insurer, but also to advise the insured client of the risk of obtaining an unenforceable policy if that disclosure is not made, and to identify alternative insurance options.

  • Significant inconsistency across multiple sworn affidavits and oral evidence will critically undermine a witness's credit, particularly where the contemporary documentary record contradicts the later accounts.

  • Under the proportionate liability provisions of the Civil Liability Act 2002 (NSW), concurrent wrongdoers may include earlier brokers and other parties who contributed to the insured's loss, but that issue must be properly pleaded for the court to give it effect.

Legislation and Cases Referenced

Legislation
- Insurance Contracts Act 1984 (Cth), ss 21, 28, 52, 57
- Civil Liability Act 2002 (NSW), ss 5B, 5C, 5D, 5E, 34
- Limitation Act 1969 (NSW), ss 14, 55
- Corporations Act 2001 (Cth), ss 917F(2), Parts 2D.1, 7.6
- Civil Procedure Act 2005 (NSW)
- Evidence Act 1995 (NSW), ss 140, 144
- Insurance Act 1973 (Cth), s 17G
- Strata Schemes Management Act 1996 (NSW), ss 82, 83, 245
- Crimes (Criminal Organisations Control) Act 2012 (NSW)
- Privacy Act 1988 (Cth), s 66

Key Cases
- CGU Insurance Ltd v Porthouse (2008) 235 CLR 103
- CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
- Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735
- Globe Church Incorporated v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470
- Commonwealth Bank of Australia v Kojic (2016) 249 FCR