The New South Wales Supreme Court was asked to determine whether an insurer was entitled to relief under the Insurance Contracts Act 1984 (Cth) s 28 in relation to alleged misrepresentations and/or nondisclosures made by an insured Hotel on a public liability insurance policy renewal form.
- Whether an insured made misrepresentations and/or failed to disclose relevant matters on a public liability insurance renewal form that entitled the insurer to avoid or reduce liability under the Policy.
This matter involved an alleged misrepresentation and breach of duty of disclosure pursuant to the Insurance Contracts Act 1984 (Cth) s 21 (ICA) by Universal 1919 (Universal) and James Kospetas in respect of completion of a public liability insurance renewal form. Universal and Mr Kospetas were the occupiers and licensees of the Civic Hotel, a three-story mixed-use Hotel comprising of a restaurant and bar on the top floor and a public bar and gaming area on the ground floor. The use of the basement level was in issue and varied daily - it sometimes hosted live music or cabarets and other times was hired out to promoters for events subject to a cover charge involving DJs.
Lloyd’s of London were the relevant insurer and provided cover for the Civic Hotel for Hotel Resort/Restaurant Public & Products Liability Insurance from 17 February 2010 to 31 January 2011 (Policy). Neon Underwriting Limited (Neon), the cross defendant, is a Lloyd’s management agent and was the underwriter of the Policy which was effected through its Australian cover holder ASR Underwriting Agencies Pty Ltd (ASR).
On 16 November 2010 an insurance renewal questionnaire was forwarded by ASR to the Civic Hotel’s insurance broker, Finn Foster APB Pty Ltd (Finn Foster). The questionnaire was comprised of a series of 'Do you have' questions with corresponding yes/no boxes and boxes for further information to be provided. Mr Kospetas completed the questionnaire with the mindset that the insurance was for the whole of the premises and answered the questions accordingly.
In response to the questions, Mr Kospetas ticked 'yes' to having a dancefloor although did not specify the size, ticked 'occasionally' to having dancing, ticked 'occasionally' to having live entertainment, ticked 'no' to having discos, ticked 'no' to having a cover charge, ticked 'no' to having a nightclub, and responded that live entertainment provided by the Hotel included DJ and cabaret.
The policy defined 'Nightclub' and excluded such operations, but otherwise stipulated elsewhere in the wording that underwriters might agree not to exclude certain activities [including nightclubs] 'provided full details are submitted to them and an additional premium (if any) is paid to cover these activities'.
The completed renewal form was referred to underwriters, and policy renewal terms were provided to the insured, which included an exclusion for 'Nightclubs' and 'Nightclub Activities'. Cover was confirmed by ASR, effective from 31 January 2011.
On 16 February 2011, Stephen Legge fell down the stairs at the Civic Hotel on the way to a bathroom in the basement level of the building and sustained spinal injuries causing paraplegia. Mr Legge subsequently brought proceedings against Universal and James Kospetas for which Universal requested indemnity under the Policy, which was refused.
The decision at trial
Neon submitted that it was entitled to relief pursuant to ICA s 28 to avoid liability entirely, or in the alternative, to have liability reduced, on the basis that Universal breached its duty of disclosure and misrepresented the Hotel premises by not disclosing that the use of the basement of the Hotel occasionally corresponded to their definition of a 'nightclub', and by submitting in their renewal that the premises did not have 'discos' or a 'cover charge', and had 'occasional' rather than 'frequent' dancing and live entertainment. Neon argued that had those disclosures been made, the insurer would have declined to renew the policy.
The Court disagreed. Lonergan J found that Universal had in its basement, on occasion, activities that might correspond to the policy definition of 'Nightclub', but concluded that Mr Kospetas had not made any misrepresentations and was afforded protection under s 26 of the ICA, because:
- Mr Kospetas genuinely believed that there was no nightclub and a reasonable person in his circumstances would have held the same view given the mixed-use premises, the varying use of the basement and the 'clumsy and confusing' definition of 'nightclub' in the Policy documents.
- Mr Kospetas, or a reasonable person in his position, could not be expected to know that those matters would be relevant to the insurer and its decision to cover the whole three-story premises.
- Neon did not satisfy the Court that it would have refused to insure the premises had it known.
The Court found that Neon was not entitled to any relief under s 28 of the ICA.
Implications for you
When arguing that an insured has misrepresented relevant matters as a basis for refusing indemnity, the issue to be determined is whether the insured believed their alleged misrepresentations to be true and whether a reasonable person in the same position would hold the same view. Insurers should also be thorough in pursuing incomplete information provided in initial proposal documentation and renewal documentation, otherwise they risk waiving the insured’s compliance with the duty of disclosure.