The New South Wales Supreme Court recently ruled that an insurer was entitled to reduce its liability to nil by reason of misrepresentation or non-disclosure in relation to the pre-insurance claim history, and was entitled to refuse payment of the claim on basis of fraud in circumstances where an insured denied pre-existing damage to machinery which was the subject of the claim.
- In an important decision for insurance lawyers, his Honour Justice Stevenson of the NSW Supreme Court considered whether an Insurer was entitled to:
1. reduce its liability to nil pursuant to s 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA) by reason of an Insured’s misrepresentation and non-disclosure; and
2. refuse payment of the claim pursuant to s 56 of the ICA by reason of the claim being made fraudulently.
In January 2019, Citiline, a sole-director concrete pumping business, engaged an insurance broker to effect, on its behalf, an insurance policy in respect of a concrete pump fitted on a Volvo truck (Unit). Although Citiline had used the Unit for some time, it had not been previously insured.
By way of an email sent on 24 January 2019, the broker had informed Chubb that there had been 'no accidents/claims' involving the Unit. Neither Citiline, nor the broker, otherwise completed a proposal form.
However, prior to 24 January 2019, the Unit had in fact been involved in two incidents in which it sustained damage. Whilst neither incident occurred through fault of Citiline, on each occasion, Citiline made a claim against the third party responsible for the accident and ultimately settled the claim through that third party's insurer.
In response to the broker’s request for a quote, Chubb provided a quote and applicable policy wording. Relevantly, Chubb’s email stated that 'terms are issued on the basis of nil losses or claims last 5 years'.
Citiline subsequently accepted the quote, without providing any further details as to the claims history. As a result, cover under Chubb’s Mobile Plant and Equipment Package Insurance Policy (Policy) was bound on 13 January 2019.
Shortly after the inception of the Policy, the Unit was damaged in the course of general maintenance by a Citline employee. Citiline sought indemnity under the Policy for the damage sustained to the Unit.
Chubb declined indemnity on the basis that Citiline breached its duty of disclosure / misrepresentation and that the claim under the Policy was made fraudulently.
Citiline commenced proceedings in the NSW Supreme Court seeking a declaration of its entitlement to indemnity under the Policy.
The decision at trial
Chubb contended that it was not liable to indemnify Citiline because:
- it was entitled pursuant to s 28(3) of the ICA to reduce its liability to nil by reason of Citiline's misrepresentation and non-disclosure relating to the Unit's history; and
- the claim was made fraudulently for the purposes of s 56 of the Act, and it was thereby entitled to refuse payment.
At the trial, Citiline conceded that the Unit 'had suffered accidents' and that 'there had been losses and claims'.
Chubb led evidence from the Head of Inland Marine Australia and New Zealand that had the broker or Citiline disclosed the circumstances, Chubb would not have provided cover.
His Honour found that statements made in the broker's email of 24 January 2019 that the Unit had not been involved in any 'accidents' and that it had not been the subject of any 'claims' were misrepresentations for the purposes s 26 of the ICA.
In this regard, his Honour held that a reasonable person in the position of Citiline could be expected to know that the statements would have been relevant to Chubb's decision to accept the risk – i.e. Citiline was seeking material damage insurance for the Unit and thus it should have been obvious to Citiline that the history of the involvement of the Unit in prior incidents, and damage sustained in those incidents, would be relevant to Chubb's decision.
For the same reasons, his Honour concluded that Citiline did not comply with its duty of disclosure under s 21 of the ICA, particularly in the face of Chubb’s statement in its 24 January 2019 email that the terms of cover were subject to there being no losses or claims for the past 5 years.
Having regard to evidence adduced at the trial, his Honour determined that Chubb was entitled to reduce its liability for the claim to nil pursuant to s 28(3) of the ICA as this was the position it would have been in had the misrepresentation not been made and the true position disclosed.
As to the second issue, his Honour found that the claim was made fraudulently in circumstances where Citiline:
- failed to reveal pre-existing damage in answer to direct questions during the interview with Chubb’s loss adjuster;
- admitted, when cross-examined, that it had made statements to loss adjuster referable to the pre-existing damage knowing them to be untrue, in order to avoid jeopardising Citiline's claim under the Policy and to make it more likely that Chubb would pay the claim.
Accordingly, his Honour held that Chubb was entitled to refuse payment of the claim by reason of s 56(1) of the ICA which enables an insurer to refuse payment of the claim if the claim is made fraudulently.
In arriving at his decision on s 56, his Honour was guided by the decision of the Victorian Court of Appeal in To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279,  VSCA 48, where the Court unanimously held that:
- for the purpose of s 56(1), a claim is made fraudulently 'if a false statement is knowingly made in connection with a claim for the purpose of inducing the insurers to meet the claim';
- it is 'not necessary to analyse the false statement to determine whether or not the falsity attaches to the basis upon which the insurer is claimed to be liable'. That is, it is not necessary that the false statement be about the incident the subject of the claim, although that may be relevant to whether s 56(2) can be invoked;
- 'fraudulently' when used in s 56 'encompasses a lie which could not prejudice the insurer even if it were believed as well as a lie which does not prejudice the insurer because the insurer is not deceived. The claimant's dishonesty is commensurate in both cases'. It was therefore immaterial that a 'lie' was 'silly' and 'easily discoverable'.
His Honour considered Citiline’s false claim for indemnity in respect of the damage to the Unit was not a 'minimal or insignificant' part of its claim and saw no room for the operation of s 56(2) which gives the Court a discretion to order an insurer to pay such amount as is just and equitable if 'only a minimal or insignificant part of the claim is made fraudulently' and it would be 'harsh and unfair' to deny the insured 'the remainder of the claim'.
Implications for you
The decision illustrates the importance of the duty of disclosure and serves as a useful reminder to brokers and insureds alike to ensure disclosure of matters prior to policy inception that a reasonable person in the insured’s position could reasonably be expected to know to be relevant to the insurer’s decision whether to accept the risk.
In circumstances where there is incontrovertible evidence of the insured’s dishonesty knowingly made for the purposes of inducing the insurer to accept the claim, the Court will have no difficulty relieving the Insurer of liability to indemnify the insured.
The decision also serves as a reminder that a claim is fraudulent under Australian law even if the misrepresentation could not prejudice the insurer even if it were believed or the insurer was not deceived. The insured’s dishonesty is commensurate in both cases.
Updated 12 June 2023: The NSW Court of Appeal dismissed an appeal by Citiline Concrete Pumping on 1 June 2023.