Inadequate disclosure frees insurance company from claim

Jul 2014 |

Michail v Australian Alliance Insurance Company Ltd [2014] 123 QCA

The failure of an insured to disclose an adverse traffic history to his insurer has resulted in the Queensland Court of Appeal recently upholding a primary judgment1 in favour of the insurer. The Court found the insurer’s guidelines confirmed it would not have entered into the contract of insurance had the insurer received notice of the insured’s adverse traffic history.

Background

In May 2011 the insured’s Aston Martin car left a public road, entered a boat ramp, and then became partly submerged in seawater. The vehicle which had been insured for $250,000.00 was assessed as a total loss.

The insurer declined the claim because of the insured’s failure to disclose his adverse traffic history prior to contract formation.  At trial (and on appeal), the insurer submitted the circumstances of the matter were such that had the true position in relation to the insured’s adverse traffic history been disclosed to the insurer at the time of entering into the insurance contract, it would not have insured the risk.

As a result of the declinature, the Court was asked to consider whether the insured had failed to comply with his duty to disclose under the Insurance Contracts Act 1984 (Cth) (ICA). 

Many readers will be familiar with the disclosure duties set out in the ICA, however, for ease of reference, the ICA makes it clear an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter:

  • the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
  • a reasonable person in the circumstances could be expected to know to be a matter so relevant.2

Where an insured fails to comply with the disclosure duties set out in the ICA, the insurer may be able to reduce their liability to the level it would have been, had the insured disclosed the relevant information.3 In some circumstances this may be a reduction to zero liability.

The trial

At trial, the insurer provided the Court with evidence of its underwriting guidelines and policies referable to the acceptance of risk apparent in proposals received from potential insureds.  This included matters which might commonly be disclosed, and which would be categorised by the insurer as either ‘referable risks’ or ‘unacceptable risks’.

In this case, the insurer submitted proper disclosure would have revealed two ‘referable risks’ both relating to an adverse driving history; one suspension and one accumulation of traffic infringements.  On the issue of ‘referable risks’ the insurer informed the Court that its internal policies and guidelines provided:

‘Where a risk involves two or more referable risks in the Driving Offences and/or Accidents or Claims categories (e.g. a license suspension and 4 to 8 traffic infringements), it is deemed to be unacceptable.’ 

As to the issue of unacceptable risk, the insurer’s employees (including the Regional Manager) gave evidence that they would have refused the insurance proposal as an unacceptable risk under their company’s National Underwriting Guidelines, had proper disclosure been made.

In finding for the insurer, the primary judge confirmed the Regional Manager was a credible witness and was accordingly satisfied the insurer, by dint of its clear underwriting policies and guidelines, would not have entered into the contract of insurance had the adverse traffic history been disclosed.  

The insured was found to have breached his duty of disclosure in regards to the policy proposal and on that basis, the insurer was entitled to reduce its liability to zero in accordance with the ICA.4

The Appeal – Queensland Court of Appeal

Dissatisfied with the Court’s decision, the insured appealed; the main issue being whether the insurer had proved it would not have proceeded with the insurance contract had true disclosure been made by the insured.

On Appeal, the insured argued the primary judge erred in finding the insurer would not have insured him because the insurer was able, at its discretion, to insure and would have exercised that discretion in this case.

The Court of Appeal disagreed, instead finding:

  • The primary judge had delivered a careful judgment which gave due consideration to the insurer’s underwriting policies specifically addressing ‘referable’ and ‘unacceptable’ risks;
  • In the first instance, the Court had correctly concluded the effect of the insurer’s clear underwriting policies was to remove any discretion to insure outside those guidelines; and
  • In consideration of the insurer’s underwriting policies, had proper disclosure been made by the insured, the insurer would not have accepted the risk, and would therefore have had no liability for the claim.5

The insured’s appeal was dismissed with costs in favour of the insurer.

Comment

This case is a timely reminder of the importance of the duty of disclosure, particularly for first party insurance contracts. 

Previous convictions or the institution of disciplinary proceedings against an individual (or a company) arising from alleged regulatory breaches or other legislation relating say, to aircraft operations or air safety, are analogous to the ‘traffic history’ forming the basis for the litigation here.

For insurers, this case highlights the importance of having clear underwriting policies and procedures in place.  This is not only a solid approach for your business, but as this recent case illustrates, it is also critical for demonstrating your underwriting policies and practices to a Court in the event an insured contests a declinature.

 

1 Michail v Australian Alliance Insurance Co Ltd [2013] QDC 284.
2 s 21.
3 s 28(3).
4 s 28(3).
5 s 28(3).