Stealth Enterprises Pty Ltd t/as The Gentlemen's Club v Calliden Insurance Limited

[2017] NSWCA 71

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71
Hearing dates:	19 August 2016
Decision date:	05 April 2017
Before:	Meagher JA at [1]; Ward JA at [76]; Sackville AJA at [80]
Decision:	1. Appeal allowed. 2. Judgment for the respondent ordered on 3 September 2015 be set aside. 3. Costs orders numbered 1 to 4 made on 12 September 2015 be set aside. 4. Judgment for the appellant against the respondent in the sum of $500,000. 5. Respondent pay the appellant’s costs of the proceedings at first instance. 6. Respondent pay the appellant’s costs of the appeal. 7. Direct the parties to confer and agree, if possible, as to the amount of interest if any payable by the respondent to the appellant under s 57 of the Insurance Contracts Act. Any such agreement is to be recorded in short minutes to be lodged with Meagher JA’s associate within seven days of the date of the making of these orders. If the parties are unable to reach agreement within that time, they are to exchange and lodge with Meagher JA’s associate within a further seven days written submissions addressing that question (those submissions in each case not to exceed three pages) which will then be decided on the papers.
Catchwords:	INSURANCE – property and liability insurance – where insured use of premises is as brothel – where claim under renewed policy for property damage as a result of fire – where appellant insured’s sole director and manager were members of Comancheros bikie gang – where that association not disclosed to respondent insurer at time of renewal – whether reasonable person in insured’s position could be expected to know that membership association relevant to insurer’s decision to underwrite risk – Insurance Contracts Act 1984 (Cth), s 21(1)(b) – whether had disclosure been made insurer would not have been on risk at time of fire – Insurance Contracts Act (Cth), s28(3) INSURANCE – property and liability insurance – where claim under renewed policy for property damage as a result of fire – where at the time of renewal registration of brothel under Prostitution Act 1992 Act (ACT) had “lapsed” because of failure to lodge annual notice – whether appellant insured knew registration had lapsed – whether had disclosure been made insurer would not have been on risk at time of fire – Insurance Contracts Act (Cth), s 28(3)
Legislation Cited:	Civil Liability Act 2002 (NSW), s 5D(3)(b) Insurance Contracts Act 1984 (Cth), ss 11(9)(b), 21, 28, 57 Insurance Contracts Amendment Act 2013 (Cth), Sch 4, Pt 1 Prostitution Act 1992 (ACT), ss 8, 11, 13
Cases Cited:	Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514 CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30 GIO General Ltd v Wallace [2001] NSWCA 299; 11 ANZ Ins Cas 61-506 Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (2003) 214 CLR 514; [2003] HCA 25 Prepaid Services Pty Ltd & Ors v Atradius Credit Insurance NV [2013] NSWCA 252; (2013) 302 ALR 732 Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182; (2003) 12 ANZ Insurance Cases 90-116 Warren v Coombes (1979) 142 CLR 531
Texts Cited:	WIB Enright and RM Merkin, Sutton on Insurance Law (4th ed 2015, Thomson Reuters)
Category:	Principal judgment
Parties:	Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club (Appellant) Calliden Insurance Limited (Respondent)
Representation:	Counsel: R Cavanagh SC with S Maybury (Appellant) JE Sexton SC with MJ Heath (Respondent)   Solicitors: MCK Lawyers (Appellant) Turks Legal (Respondent)
File Number(s):	2015/279424
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Common Law Citation: [2015] NSWSC 1270 [2015] NSWSC 1691 Date of Decision: 03 September 2015 Before: Schmidt J File Number(s): 2012/324562

Headnote

[This headnote is not to be read as part of the judgment]

The appellant insured owned and operated a brothel from premises in the ACT. Those premises were insured against property damage and liability by the respondent insurer under its “Adult Industry Insurance Policy” which was marketed to the owners and operators of such businesses. On 1 January 2012 the premises were damaged by fire. The appellant made a claim under the renewed policy current at the time of that fire.

The respondent insurer denied liability on the basis that at the time the policy was renewed, the appellant had failed to comply with its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act) in two respects. The first matter not disclosed was that the appellant’s sole director and manager were members of the Comancheros bikie gang. The second was that at the time of renewal, the brothel’s registration under the Prostitution Act 1992 (ACT) had lapsed due to a failure to lodge an annual notice.

The primary judge found that the appellant had failed to comply with its duty of disclosure in relation to each of these matters and that, had they been disclosed, the respondent would not have renewed the policy and been on risk at the time of the fire. Accordingly, the primary judge held that the respondent was entitled to have its liability reduced to nil under s 28(3) of the Insurance Contracts Act.

The issues in the appeal were:

i. Whether a reasonable person in the circumstances of the appellant insured could be expected to know that the association between the appellant and the Comancheros bikie gang was relevant to the respondent insurer’s decision whether to accept the risk by renewing the policy (Insurance Contracts Act, s 21(1)(b)).

ii. Whether, had the disclosure of that association been made, the respondent insurer would not have been on risk at the time of the fire, so was entitled to have its liability reduced to nil (Insurance Contracts Act, s 28(3)).

iii. Whether at time of renewal in September 2011 the appellant insured knew that registration of the brothel had lapsed or not been maintained (Insurance Contracts Act, s 21(1)(a)).

iv. Whether, had the fact of the lapsed registration been disclosed to the respondent, it would not have renewed the policy or otherwise insured the premises, so was entitled to have liability reduced to nil (Insurance Contracts Act s 28(3)).

The Court held allowing the appeal:

In relation to (i):

It was not established that a reasonable person in the circumstances could be expected to know this association was relevant to the insurer’s underwriting decision (Meagher JA, Ward JA and Sackville AJA agreeing).

A reasonable insured could understand that an underwriter specialising in the insurance of brothels would expect that people with criminal connections were likely to be involved in the use of the premises: Meagher JA [52], Sackville AJA [83]

If it was relevant to the insurer to know of the fact of any general association between the insured and any particular activity or organisation, a reasonable insured might have expected that there would be questions in the proposal addressed to that subject: Meagher JA [53], Ward JA [73], Sackville AJA [83]

The fact of the membership association did not give rise to any matter relied on that a reasonable person would not have expected to arise from the nature of the use of the premises as a brothel. The association without more could not be expected to justify a different or more adverse underwriting assessment than the risk described in the proposal: Meagher JA [55], Sackville AJA [84]

Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 considered

In relation to ii:

It was not established that had disclosure of the association been made the insurer would not have renewed the policy (Sackville AJA, Meagher and Ward JJA agreeing)

There was no contemporaneous and objective evidence supporting the underwriter’s assessment that she would have declined to renew the policy had the association been disclosed. The evidence as a whole did not support the finding that, had the respondent insurer been made aware of the association, it would have declined to renew the policy: Meagher JA [59]-[60]; Sackville AJA [96]-[97]

Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 considered

In relation to iii:

The insured was aware of the fact of the lapsed registration (Meagher JA, Ward JA and Sackville AJA agreeing).

The primary judge did not err in inferring that the insured was aware that its registration had lapsed on 30 September 2010 and that it required a further notice be given: Meagher JA [64].

In relation to iv:

It was not established that had disclosure of the lapsed registration been made the insurer would not have renewed or otherwise insured the premises at the time of the fire (Meagher JA, Ward JA and Sackville AJA agreeing).

There was evidence from which the Court might reasonably infer that had there been disclosure of the lapse of registration, the appellant would have remedied the problem of its registration and subsequently obtained insurance so that the respondent would have been on risk at the time of the fire. In the face of that evidence the insurer was not entitled to reduce its liability to nil : Meagher JA [67], Ward JA [74]

Judgment

MEAGHER JA:

Introduction

1. The appellant (Stealth) owned and operated a brothel from premises in the Australian Capital Territory. That business, carried on under the name “The Gentlemen’s Club”, was insured under a contract of insurance providing cover against property damage, including by fire, and public and product liability. The insurance was first issued for the period 3 September 2010 to 3 September 2011 and then renewed for 12 months to 3 September 2012. On 1 January 2012 the premises were damaged by fire.

2. The respondent insurer, Calliden Insurance Ltd (Calliden), denied liability for that claim, relevantly on the basis that there was a failure by Stealth to comply in two respects with its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) (the Insurance ContractsAct). The first matter that was not disclosed was that Stealth’s sole director, Mr Baris Tukel, and his brother, Mr Fidel Tukel, the manager of the brothel, were members of the Comancheros bikie gang. At the same time, it was not suggested that Stealth was owned or controlled by that “organisation” or that the premises were held or operated in some way for its benefit. The second was that the brothel’s registration under the Prostitution Act 1992 (ACT) lapsed or expired on 30 September 2010, with the result that it was not current at the time of renewal of the policy in September 2011.

3. The primary judge held that Stealth had failed to comply with its duty of disclosure in relation to each of these matters and that Calliden would not have renewed the policy if either had been disclosed at that time. In these circumstances her Honour held that Calliden was entitled to have its liability reduced to nil under s 28(3) of the Insurance Contracts Act: Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2015] NSWSC 1270. Had Stealth’s claim been upheld it was agreed it would have been entitled to $500,000 by way of indemnity.

4. Her Honour also held in relation to the first matter that Stealth did not comply with its duty of disclosure in September 2010 when the policy was first issued. However it is accepted before this Court (but was argued otherwise before the primary judge), that whether or not there was any non-disclosure under the earlier contract is not relevant to Calliden’s entitlement to deny liability to Stealth under the renewed policy, which was the insurance current at the time of the fire.

Sections 21 and 28 of the Insurance Contracts Act

5. It is convenient at this point to set out the relevant provisions of ss 21 and 28 of the Insurance Contracts Act.

6. Section 21 provided (before its amendment, with effect from 28 December 2015, by the Insurance Contracts Amendment Act 2013 (Cth) Sch 4, Pt 1):

21   The insured’s duty of disclosure

(1)   Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a)   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

(b)   a reasonable person in the circumstances could be expected to know to be a matter so relevant.

7. Stealth did not rely upon the application of s 21(2), which describes matters that are not required to be disclosed, and there was no issue which turned on any answer to a question included in the proposal, so as to engage the possible application of s 21(3).

8. The non-disclosure issues in this Court are confined to failures to comply which are alleged to have been innocent, as distinct from fraudulent. In relation to such failures s 28 provides:

28   General insurance

(1)   This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:

(a)   failed to comply with the duty of disclosure; or

(b)   made a misrepresentation to the insurer before the contract was entered into;

but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.

…

(3)   If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.

9. In its terms s 28 applies where the person who became the insured under a contract of insurance failed to comply with the duty of disclosure “upon the contract being entered into”. Section 11(9)(b) of the Insurance Contracts Act provides that the reference to “the entering into of a contract of insurance” includes the making of such a contract by the renewal of an existing contract. In the case of an innocent non-disclosure where it applies s 28(3) reduces the liability of the insurer for a claim made under the contract in respect of which the non-disclosure occurred.

10. In Prepaid Services Pty Ltd & Ors v Atradius Credit InsuranceNV [2013] NSWCA 252; (2013) 302 ALR 732 at [71] this Court (Meagher JA, Macfarlan and Emmett JJA agreeing) described the inquiry called for when determining the amount, if any, to which the insurer is entitled to have its liability reduced in a case where the insurer relies on a misrepresentation:

“This provision requires an inquiry as to the position the insurer would have been in if the relevant misrepresentation had not been made. It is the same as would be made if the insurer was claiming damages for misrepresentation in the amount by which it seeks to have the insured's claim reduced. Accordingly, it must establish on the balance of probabilities what it says its position would have been if the misrepresentation had not occurred. That is so notwithstanding that the hypothesis upon which the reduction of liability is based is not an historical fact. By its defence Atradius claimed it was entitled to reduce its liability to nil because it would not have entered into any policy which would have covered all or part of the appellants' claim. Accordingly, it was necessary for the primary judge to determine whether Atradius had established on the balance of probabilities that it would not have issued a policy to the appellants which would have provided any insurance of the BXP defaults.”

The issues in the appeal

11. The issues in this appeal are:

1. Whether Stealth knew, or a reasonable person in the circumstances could be expected to know, that the association between Baris and Fidel Tukel and the Comancheros bikie gang was relevant to Calliden’s decision whether to accept the risk by renewing the policy, and if so, on what terms (grounds of appeal 3 and 4).

2. Whether, if that association had been disclosed to Calliden, it would not have renewed the insurance (grounds of appeal 5 and 10).

3. Whether at the time of renewal, Stealth knew that the registration of the brothel had lapsed or not been maintained (ground of appeal 6).

4. Whether, if the fact of the lapse of registration had been disclosed to Calliden, it would not have renewed the policy or otherwise insured the premises against property damage at the time of the fire (grounds of appeal 8 and 10).

12. With the exception of ground 9, the remaining grounds either describe more generally questions raised by these more specific grounds, or refer to matters necessarily raised by those grounds. Grounds of appeal 1 and 2 assert error on the part of the primary judge in holding that Stealth failed to comply with its duty of disclosure entitling Calliden to reduce its liability to nil. Ground 7 alleges errors in the drawing of inferences as to Stealth’s knowledge of the matters that were not disclosed, and their relevance to Calliden’s underwriting decision.

13. Ground of appeal 9 alleges error on the part of the primary judge in admitting as expert opinion evidence a report of Mr Macken, an Intelligence Analyst employed by the NSW Police Force. That evidence was described by the primary judge at Judgment [27] as going to “the history, hierarchy, involvement in the adult entertainment industry and known criminal activities of the Comancheros and other bikie gangs”. Ultimately the evidence was relied on to prove two matters which were contended by Calliden to be matters of “common knowledge”, and accordingly within the knowledge and experience of ordinary persons. They were that the Comancheros was a bikie gang and that it was known to engage in activity which may result in property damage or personal injury. The primary judge found that by 2010 each of those facts was a matter of common knowledge: Judgment [94], [101]. That finding is not challenged and ground 9 was not pressed in Stealth’s written or oral submissions.

14. An understanding of these issues, and their resolution, is assisted by a summary of the following background facts which are not controversial.

Background facts

15. The brothel business was purchased by Stealth in August 2009. At that time it traded under the name “Charlie’s Angels Escorts”. In October 2009 Stealth lodged with the Registrar of Brothels and Escorts Agencies, in accordance with s 12 of the Prostitution Act as it then provided, a notice that it was operating the business under that name. A certificate was then issued recording that fact and that it was valid from 1 October 2009 until 30 September 2010. The reference to the period of validity of that certificate was consistent with Stealth’s continuing obligation under s 13 of that Act, as operator of the brothel, to lodge with the registrar an annual notice before 1 October in each year following the giving of that first registration notice.

16. Stealth renovated the premises and in April 2010 commenced operating the brothel under the name The Gentlemen’s Club. In March 2010 it obtained public and products liability insurance from Calliden through an intermediary, OAMPS Brokers (OAMPS). That cover was issued for the period from 18 March 2010 to 18 March 2011, and subsequently cancelled on 30 August 2010 for non-payment of the premium. In June 2010 Fidel Tukel completed a proposal for property and liability cover with Calliden. That proposal wrongly described the required period of insurance as being 8 June 2011 to 8 June 2012. Calliden’s quote for that insurance was pursued and cover finalised on 3 September 2010. Mr Tuitavuki was the underwriter who approved the issue of that policy. By the time this insurance was issued Baris and Fidel Tukel had become members of the Comancheros. In March 2011 Baris Tukel became a “sergeant at arms” in that organisation.

15. The policy issued by Calliden was described as a “Business Pack, Adult Industry Insurance Policy”. The proposal contained questions under three headings and concluded with a declaration signed by Fidel Tukel. Those headings were “Your General History”, “Details of the Premises and Business” and “Select the Types of Insurance You Require”. Question 1, 2 and 3 under the first heading were:

1.   After investigation, have you or any principal, partner, or director, either alone or jointly with others ever, in the last 5 years:

(a)	Had any insurance declined or cancelled, application / proposal rejected, renewal refused, claim rejected, or special conditions or excess imposed by any insurer?	Yes	No
(b)	Claimed on any insurance for loss; or damage or suffered any loss or damage which would be insured by this proposed insurance?	Yes	No
(c)	Been charged with or convicted of any criminal offence (excluding traffic offences)	Yes	No

2.   Have you ever, either alone or jointly been declared bankrupt or subject to any form of insolvency administration (e.g liquidation or receivership)?

3.   How many years have you been in business?

18. The proposal provided for the inclusion of details in the event of an affirmative answer to any part of questions 1 and 2. Each of those questions was answered in the negative.

19. Question 13, under the second heading was:

Are the premises licensed and approved by local government and all the relevant regulatory bodies for the services/activities which are conducted at the premises?

That question was answered “yes” and as a result no reasons were provided for the premises “not being licensed/approved”.

20. The declaration at the conclusion of the proposal included the following:

I/We

(a)   declare that:

(i)   the answers and information given by me/us in this proposal are true and correct in all respects;

(ii)   no Information has been withheld that would affect Calliden's decision to accept this proposal;

(iii)   where answers in this proposal are not my/our own handwriting, they have been checked by me/us and I/we agree they are correct;

(iv)   I/we have read and understood the clauses detailed under the Important Notices section at the front of this proposal;

(v)   if there was insufficient space to fully answer any questions, we have attached ___ supplementary pages providing the additional information required.

21. The reference to the “Important Notices” section at the front of the proposal was to a series of notices including the following under the heading “Duty of Disclosure”:

Before you take out insurance with us, you have a duty to tell us of everything that you know, or could reasonably be expected to know, that is relevant to our decision to insure you and to the terms of that insurance. If you are not sure whether something is relevant you should inform us anyway.

You have the same duty to inform us of those matters before you renew, extend, vary or reinstate your contract of insurance.

Your duty however does not require disclosure of matters that:

●   Reduce the risk

●   Are common knowledge

●   We know or, in the ordinary course of our business, ought to know, and

●   We have indicated we do not want to know.

22. The Adult Industry Insurance Policy issued to Stealth was offered under a broking arrangement between Calliden and OAMPS. That arrangement was described as the “OAMPS Insurance Broker Adult Industry Scheme” and was for the underwriting of packaged business insurance for “businesses” in that industry. The types of businesses for which that insurance was available were described in underwriting guidelines (see [26] below) as follows:

i. Adult retail stores - stores retailing in adult publications and electronic media (including viewing booths), erotic/fetish clothing, sex toys & other marital aids.

ii. Adult Party planners - organisers of strip-shows for private functions, organisers of private parties promoting/selling adult products including adult publications and electronic media, erotic/fetish clothing, sex toys &. other marital aids.

iii. Adult Mail-order operations - as per adult retail stores but with all or predominantly most of the sales derived from mail-orders.

iv. Brothels - a venue where people pay to generally have sex or sexual contact with a sex worker. Massage parlours where there is "no sex" fall within this definition. For the purposes of these Underwriting Guidelines, these venues generally do not have any "open" areas where a sex worker strips or provides live entertainment similar to a "Strip-joint/Table-top Dancing" venue.

v. Swingers club - a venue where couples can participate in a variety of sexual activities with or without their partner, and with or without multiple people.

vi. Strip-joints/Table-top Dancing - venues where there is predominantly strip-dancing &/or dancing in lingerie along with the possibility of interaction with sex workers.

vii. Lingerie restaurants - venues where it is a white-table restaurant and where the waitresses/waiters are in erotic or fetish attire. These venues may also provide live strip shows &/or table-top dancing. These venues do NOT provide any interaction with a sex-worker.

23. On 6 September 2010 OAMPS wrote to “Selda” at Stealth advising that the insurance for the period 3 September 2010 to 3 September 2011 had been placed, and enclosing a premium invoice for $8,359.76. Nearly twelve months later, on 1 September 2011, OAMPS wrote to Stealth, again to the attention of Selda, at the post office box address given in the proposal and to which the invoice for the initial premium had been sent. That letter recorded that the policy had been renewed for the period 3 September 2011 to 3 September 2012 and enclosed an invoice for the premium of $8,899.84 and a “premium funding quotation”. On 14 October 2011 OAMPS sent the following email to Fidel Tukel at his email address, also given in the proposal:

“Last year I was dealing with Selda and organised the insurance cover for The Gentlemens Club. The policy was due for renewal on 3/9/11- I tried to get in contact with Selda by phone, email, mail but to no avail. I have renewed the policy with the Insurer to ensure cover was place [sic] as I had not heard from anyone.

…

Could you please let me know if the insurance is still required, the insurance cover will be cancelled by the end of the month if payment is not received.”

24. Fidel Tukel responded by email on 16 October 2011:

“Sorry, myself and Selda split up after 6 years, she never forwarded nothing to me.

Could we please remain on the same insurance with the same details.

If you need me to change over any particulars please send me any details that need to be filled out so we can commence this immediately.”

25. The renewal of the insurance, as arranged by OAMPS, had been approved on 29 August 2011 by Ms Shepherd, another underwriter employed by Calliden. The payment of the premium for that renewal was funded by Monument Premium Funding. At some stage after the fire on 1 January 2012 Stealth ceased to make repayments in respect of that funding. As a result the renewed policy was cancelled with effect from 3 June 2012.

26. At the time the policy was written and renewed there were specific underwriting guidelines that had been prepared for the “Adult Industry Scheme” and, more general underwriting guidelines, which formed part of the “Calliden Package Business Underwriting Manual”. The specific guidelines formed part of the broking arrangements between OAMPS and Calliden.

27. Those guidelines contain the description of the different types of businesses falling within that scheme (see [22] above) and a summary of the cover and rates on which insurance was offered in respect of those different businesses. At the conclusion of the guidelines there are the following descriptions of risks, separately described as “referrable” and “decline”:

REFERRABLE RISKS

1.   Risks engaged in activities not normal to the occupations detailed above.

2.   Risks situated on islands which are not connected to mainland Australia or Tasmania by road.

3.   Risks where the sum insured or limit exceed those stated in these Underwriting Guidelines.

4.   Risks not on reticulated water.

5.   Any risks which in the past 5 years has suffered:

(a)   for liability, a notification of an incident or claim; and/or

(b)   for all other classes, 3 or more claims and/or where the total incurred loss for all claims exceeds $20,000.

6.   Risks where the insured discloses prior criminal convictions (as defined in the proposal form), past declinature or special terms imposed, or where the insured is in receivership or is an undischarged bankrupt.

7.   Any adjustment to the sub limits listed under the Policy Wording.

8.   Risks which are above the Tropic of Capricorn and within 20 kilometres of the coast.

9.   Risks of inferior structure.

10.   For Liability, pure property owners risks where Gross Rental exceed $300,000.

11.   Swingers clubs or promote themselves as such.

12.   Policy period longer than 12 months.

DECLINE RISKS

1.   Risks not related to the adult industry.

2.   Policy period longer than 15 months.

3.   Risks which are "Referrable" but have not been referred to and signed-off by Calliden.

4.   Amendments to the agreed wording specified in this underwriting guideline without written consent of Calliden.

5.   Discounting premium or rates from underwriting guidelines without written consent of Calliden.

6.   Risks expressly excluded or not specified in this underwriting guideline.

7.   Alteration to the agreed rate of commission.

8.   Any risks where the people engaged (either as staff or contractors) are illegal immigrants

28. The Calliden underwriting manual records that at the relevant time it had six underwriting authority levels. Mr Tuitavuki and Ms Shepherd were senior underwriters at level three and the underwriter to whom they reported, Mr Addison, was a level four or level five underwriter (Ms Shepherd’s evidence was that he was level five). That manual contains no guidelines directed specifically to the Adult Industry Scheme. However it includes the following under the heading “Insured’s History and Referrals/ declinatures not appearing in the Risk Occupation/ Classification Tables”:

Declinatures

Risk acceptance is not only based on the material facts proposed but also on the moral risk of the proposing Insured. Anything that may affect the moral risk is considered relevant to our decision to accept the risk.

With this in mind, Calliden adopts the philosophy not to accept risks where the proposing Insured either as an individual or incorporated entity has:

●   suffered a loss through arson (note: on the provision of adequate details this may be waived by an underwriter with authority level (4));

●   been declared bankrupt (note: on the provision of adequate details this may be waived by an underwriter with authority level (4));

●   had claims denied on the grounds of fraud;

●   been declined by another Insurer for purposes other than "change in Underwriting Guidelines" (note: on the provision of adequate details this may be waived by an underwriter with authority level (4));

●   within the last 10 years, been charged with or convicted of a criminal offence (other than a minor traffic convictions) (note: on the provision of adequate details this may be waived by an underwriter with authority level (4));

●   has received threats or is aware of any employees receiving threats to damage property or attack their persons (note: on the provision of adequate details this may be waived by an underwriter with authority level (4));

Also note that new business quotations or increases in sums insured, be it mid-term and/or on renewal should not to be accepted where the risk is exposed to obvious impending danger (e.g. fire, flood, cyclone, hail, death threats etc).

Please note that in some cases legislation relating to spent convictions and/or relating to the recording of convictions may affect our ability to site [sic] past offences as a reason for denying the provision of insurance. If in doubt this needs to be referred to an authority (4) for further investigation and escalation as this is a compliance issue. Note that legislation in relation to spent convictions is state based and varies throughout Australia.

Whether Stealth knew or a reasonable person in the circumstances could be expected to know the association with the Comancheros was relevant to Calliden’s underwriting decision (grounds of appeal 3 and 4)

29. There was no issue that at the time of renewal Stealth knew that Baris and Fidel Tukel were members of the Comancheros bikie gang and that Baris held the office or position of sergeant at arms. That was the first matter relied on as known and not disclosed.

30. The primary judge found that the fact of that membership was relevant to Calliden’s decisions to insure, and to renew the insurance: Judgment [116], [160]-[161]. Her Honour did so on the basis of the evidence of Mr Tuitavuki and Ms Shepherd: Judgment [117]-[118], [160]. Those matters were regarded as relevant because it was considered that members of the Comancheros, and businesses with which those members were associated, could become targets of bikie gang violence and conflict, resulting in property damage. That this was the nature of the asserted relevance of this first matter emerges, in particular, from her Honour’s observations at Judgment [161].

31. Each of these underwriters gave evidence that the fact of this membership association was a matter which would have affected their decision to accept the risk of insuring Stealth against property damage and public liability arising from its occupation of the premises. Their evidence was that the fact of the association meant that Calliden would not have accepted the risk. Accordingly no question arises in this case as to whether “relevance” in this context could describe and include something which might be taken into account, although ultimately discarded as not affecting the underwriting decision which would otherwise have been made. In this respect see the remarks of Kirby P in Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514, esp at 517-519 concerning the test of materiality under the common law and whether it required the disclosure of matter of the latter kind. The current editors of Sutton on Insurance Law (WIB Enright and RM Merkin, 4th ed 2015, Thomson Reuters) at [7.50], [7.220] proceed on the basis that s 21(1) would not require disclosure of such matter, a view supported by dicta of McPherson JA in Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182; (2003) 12 ANZ Insurance Cases 90-116 at [72].

32. Mr Tuitavuki’s evidence included that he considered the fact of the association to increase the risk of property damage because “motorcycle gangs such as the Comancheros and similar gangs are involved in gang rivalry and from time to time seek retribution which may result in property damage”. He maintained that position in cross-examination principally because he regarded members of bikie gangs like the Comancheros as people who “played outside the law” and could “intimidate people” and cause harm to them. The primary judge considered Mr Tuitavuki’s evidence to be “generally credible”, and in this respect accepted it: Judgment [107], [111], [118].

33. Ms Shepherd’s evidence, which was not challenged in cross-examination, was that she would have associated the “Comancheros with illegal activities which may have increased the risk of an insured event occurring, particularly property damage and public liability risks”. Again the primary judge considered Ms Shepherd to be an honest witness and accepted her evidence in relation to whether she would have renewed the insurance: Judgment [109], [111], [118].

34. These findings as to the relevance of these matters to Calliden’s underwriting decisions are not in terms challenged by any of the grounds of appeal. Nor was any written or oral argument directed to challenging those findings, as distinct from her Honour’s conclusions that Stealth knew, and that a reasonable person in the circumstance could be expected to know, that they were relevant. That being the position grounds 3 and 4 fall to be dealt with on the basis that the fact of Baris and Fidel Tukels’ membership of the Comancheros was “relevant” to Calliden in the sense described above.

35. The primary Judge found that Stealth knew that the membership of Fidel Tukel and Baris Tukel in the Comancheros was relevant to Calliden’s decision to renew the policy: Judgment [168]. However, in this Court Calliden does not seek to support that finding of actual knowledge, which the majority (McHugh, Kirby and Callinan JJ) in Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (2003) 214 CLR 514 at [30]; [2003] HCA 25 described as meaning “considerably more than ‘believes’ or ‘suspects’ or even ‘strongly suspects’”.

36. In relation to what a reasonable person could be expected to know, the primary judge concluded at Judgment [176]:

In this case, I am satisfied that given not only what was known to Stealth Enterprises directly about Comancheros membership of its director and manager, but also from what was, from 2010, a matter of common knowledge about the activities of the Comancheros and its members, that a reasonable person could be expected to know that membership of the Comancheros was relevant to Calliden’s decision to accept the risk of insuring the brothel which Stealth Enterprises owned and operated.

37. That “matter of common knowledge” is described at Judgment [94]:

… by 2010, bikie gangs, including the Comancheros, were widely known to engage in activity which may result in property damage or personal injury; that was not something about which reasonable minds might then have had different opinions; and indeed, that … was a matter which had become generally known.

38. In CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30 the Court (Gummow, Kirby, Heydon, Crennan and Kiefel JJ) was concerned with the construction of a clause that excluded from the cover claims arising from circumstances a “reasonable person in the Insured’s professional position” would have thought might result in a claim. In that context the Court referred to s 21(1)(b) which also operates by reference to the (notional) knowledge of a reasonable person in the circumstances of the insured. It said of that provision at [52]:

That … statutory phrase has been interpreted as meaning that one should take into account only factors which are "extrinsic" to the insured, such as the circumstances in which the policy was entered into, rather than "intrinsic" factors such as the individual idiosyncrasies of the insured. Whilst it is possible to take into account the circumstances of the insured, the ultimate question under s 21(1)(b) turns on consideration of a reasonable person's state of mind, not the insured's state of mind.

39. The test for disclosure in s 21(1)(b) takes an objective standard – that of a hypothetical reasonable person – and requires a determination as to whether “in the circumstances” it “could be expected” that person would “know” the matter not disclosed to have been relevant. Thus it poses the question whether a reasonable person in the circumstances could be expected to know that the matter was relevant to the insurer’s decision to accept the risk. In answering that question:

“it is necessary … to take into account the circumstances affecting the actual insured, but the ultimate question turns on what could be expected of a reasonable person’s state of mind, not on the insured’s state of mind”.

GIO General Ltd v Wallace [2001] NSWCA 299; 11 ANZ Ins Cas 61-506 at [23] (Heydon JA), cited with approval in Porthouse at [52 n 37].

40. In this case that determination requires an evaluation of what that person “could be expected to know” in circumstances which are not disputed. For that reason, as was also held to be the position in Porthouse at [69], this Court is in as good a position as the primary judge was to make that determination; and having done so this Court must not “shrink from giving effect to it”: Warren v Coombes (1979) 142 CLR 531 at 551 (Gibbs ACJ, Jacobs and Murphy JJ).

40. As is noted above, the imputing of knowledge of the insured’s “circumstances” to the hypothetical reasonable person is directed to putting them in the same position as the insured without taking into account the insured’s subjective state of mind (for example, that the insured thought information was irrelevant to an insurer). The Court does however take into account that the insured knows the facts relied on as not having been disclosed (in this case, the Tukel brothers’ association with the Comancheros): see Porthouse at [53], [57]. Here the insured’s “circumstances” include the nature of the business conducted by Stealth, the type of insurance sought, the identity of the insurer, the circumstances in which the insurance was entered into and renewed, as well as the fact of the association between the insured’s director and general manager and the Comancheros. It was not suggested that for the purposes of determining whether s 21(1)(b) was satisfied the “reasonable person” was also to be assumed to be a member of a bikie gang with whatever knowledge that might entail or to have knowledge of the content of the underwriting guidelines referred to earlier.

41. Accordingly the hypothetical brothel owner at the time Stealth renewed the policy, and was subject to the duty of disclosure, should be taken to have known the following.

42. First, that the insurance was of property and liability risks associated with the conduct and operation of a brothel in the ACT.

43. Secondly, that the insurance was offered through a broker and insurer who specialised in insuring businesses engaged in the “Adult Industry”. That much would have been apparent from the terms of the proposal and policy wording, and the involvement of OAMPS.

44. Thirdly, that from an insurer’s perspective the use of the premises as a legal brothel would be considered to increase the risk of property damage and liability claims above that which could be expected if their use was otherwise; and that the risks such an assessment would take into account would include those arising from the (actual or perceived) disreputable or questionable character and associations of those involved in the operation of brothels, including the sex workers and their customers.

45. In Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673, in relation to the insurance of premises which were being used as an illegal brothel and the non-disclosure of that fact, Rogers CJ Comm D held (at 684) that a reasonable person in the insured brothel operator’s circumstances could be expected to know that the nature of that use was relevant because:

… [it] could put the safety of the premises in danger. Arson, standover tactics, fights, dissatisfied customers, seem to be all dangers attendant on the conduct of a brothel and, in turn, put the safety of the premises at risk.

In the course of oral argument counsel for Calliden accepted that this description of risks arising from use as an illegal brothel was equally “true for a legal brothel”.

47. Fourthly, that the proposal for the insurance directed specific questions to the claims histories of the insured and its directors, and as to whether they had been charged or convicted of any criminal offence in the last 5 years; but that the insurer directed no further questions to any criminal or other associations of those directors.

48. Fifthly, as the “Duty of Disclosure” notice made clear, that the insured’s duty was to disclose what was known, or could reasonably be expected to be known, to be relevant to Calliden’s decision to insure; that there were likely to be matters which did not answer that description; and that the proposing insured was not required to disclose matters of common knowledge or matters that the insurer in the ordinary course of business ought to know.

49. Finally, in addition to knowing of the membership of Baris and Fidel Tukel in the Comancheros bikie gang, that hypothetical brothel owner would have understood, as was held to be common knowledge, that the Comancheros was a bikie gang known to engage in activity which may result in property damage or personal injury. That person equally would have appreciated that there was no suggestion that the brothel business was conducted for or on behalf of that gang; or that the brothel premises were in any sense used or occupied by its members, although some of them, and members of other bikie gangs, may have been customers; or that any threats of damage or violence had been made either to Stealth or to its officers, either in that capacity or in their capacity as members of the Comancheros.

50. Addressing the question posed by s 21(1)(b) it is necessary to consider whether, having regard to the circumstances affecting Stealth, a reasonable person could be expected to know that the association with the Comancheros was relevant to Calliden’s decision to accept the risk. That test is not satisfied if a reasonable person could be expected merely to have a suspicion that the information might be relevant to the insurer’s decision.

51. In my view a reasonable person could not to be expected to know that the fact of the brothers’ membership without more was so relevant. It may be accepted that such a person could be expected to appreciate that the membership association carried with it the possibility of violence involving members of bikie gangs. However that person is likely to have regarded that as a risk which arose by reason of the nature of the use of the premises and the character of the persons expected to be involved in that use. It was the sort of association the insurer would expect and take into account as part of the general risk of insuring a brothel; and there were no particular circumstances related to the association, such as the making of threats, that took it outside that general risk.

52. As Calliden accepted, consistently with the conclusion in Lindsay, the dangers which a reasonable person would expect ordinarily to be attendant on the conduct of a brothel are taken to include “[a]rson, standover tactics, fights, dissatisfied customers”. Moreover, a reasonable person would take into account that Calliden specifically targeted so-called “adult industries” including brothels. Such a person could reasonably understand that an underwriter not only specialising in the insurance of brothels but actively seeking their business would expect that people with criminal connections, including as members of bikie gangs, were likely to be involved in the use of the premises, including as customers. The reasonableness of such a belief was to some extent confirmed by the evidence of Ms Shepherd, on the basis of conversations with Mr Addison (the senior Calliden underwriter), that it was her understanding that “members of bikie gangs were involved in the adult industry” and that she believed more generally, as must have been obvious, that those involved in Calliden’s adult industry insurance scheme included people of “ill-repute”.

53. There were no questions in the proposal directed to the identity of associates of the insured or its directors. Instead the proposal focussed on whether the owner, or directors of a corporate owner, had been charged with or convicted of any criminal offence in the last five years. If it was relevant to the insurer to know of the fact of any general association between the insured or its directors and any particular activity or organisation, a reasonable person might reasonably have expected that there would have been questions addressed to that subject.

54. The reasonableness of a belief that the existence of such associations, without more, was not likely to be relevant to the insurer was also consistent with Calliden’s specific and general underwriting guidelines which did not provide that the fact of such an association either made the brothel risk a “referrable” one (see [27] above) or one that involved an unacceptable “moral hazard” requiring that it be declined (see [28] above).

55. In addressing what a reasonable person could be expected to know, the primary judge did not consider why such a person would have considered the fact of the membership association to be relevant to Calliden’s underwriting decision. In my view her Honour erred in not doing so. That inquiry would have directed attention to the absence of any circumstance in the matter relied on that would not have been expected to arise from the nature of the use of the premises as a brothel. For that reason that matter could not reasonably be expected to justify any different and more adverse underwriting assessment than the risk as described in the proposal. In that state of affairs it cannot be concluded that such a reasonable person could be expected to know that matter to have been relevant.

56. For these reasons ground of appeal 4 is made out in circumstances where it is accepted by the respondent that the finding of actual knowledge could not be supported other than by a process of reasoning that would justify a finding of knowledge within s 21(1)(b).

Whether if the insured’s association with the Comancheros had been disclosed to Calliden it would not have renewed the insurance (grounds of appeal 5 and 10)

57. In view of my conclusion in relation to ground 4, grounds 5 and 10 (to the extent that it deals with non-disclosure of the Comancheros membership association) do not arise.

58. Those grounds challenge her Honour’s conclusion at Judgment [222] that Calliden would not have renewed the policy had this matter been disclosed at the time of renewal in September and October 2011. That finding accepted Ms Shepherd’s evidence, as the underwriter who approved the renewal in late August 2011, that she would have declined to renew if that matter was disclosed: Judgment [205], [222], [255]; and was based, at least in part, on the primary judge’s assessment of Ms Shepherd as an honest and truthful witness: Judgment [109]-[110].

59. Sackville AJA has addressed the challenge to that conclusion and I agree for the reasons his Honour gives that the primary judge erred in being satisfied on the balance of probabilities that Calliden would not have renewed the policy had the Comancheros association been disclosed.

60. It follows that had they arisen, grounds 5 and 10 (to the extent relevant) would have been upheld.

Whether at the time of renewal in September 2011 Stealth knew that the registration of the brothel had lapsed or not been maintained (ground of appeal 6)

61. The second matter alleged not to have been disclosed was that after 30 September 2010 Stealth did not comply with its obligation to give or lodge a registration notice under s 12 of the Prostitution Act, and an annual notice as required by s 13. The evidence included that on 6 September 2010 a “renewal notice was issued” to Stealth and posted to an address in Bruce, a suburb of the ACT. The evidence does not explain the significance of that address, which may have been the business address given for Stealth in the registration notice lodged in October 2009. That Bruce address was not the address of the premises or an address of Stealth or either of the Tukels given on the proposal for the insurance.

62. The primary judge found that in October 2009 Stealth obtained registration of the brothel and received a certificate which on the face of it recorded that it was valid from “1 October 2009 until 30 September 2010 inclusive”: Judgment [233]. Her Honour concluded, having regard to the fact that Fidel Tukel answered in the affirmative the question in the proposal as to whether the premises were “licensed and approved by local government and all the relevant state regulatory bodies”, that at that time (June 2010) he was aware that a registration notice had been lodged in accordance with the Prostitution Act and, that it was effective until 30 September 2010. On that basis her Honour inferred (Judgment [231]-[233]), in the absence of any evidence from Fidel Tukel to the contrary, that in June 2010 he understood that any registration approval required under that Act lapsed on 30 September 2010. Her Honour also inferred that he knew, because he had not done so, that no further registration or annual notice had been lodged after that date, and that as a result he understood that the brothel’s registration and approval had lapsed, and that that remained the position at time of the renewal in September and October 2011.

63. By ground of appeal 6 Stealth challenges those findings. It did not challenge the finding at Judgment [232] that the absence of any current registration or approval of the brothel was a matter relevant to Calliden’s decision to renew the insurance.

64. Stealth submits that her Honour erred in inferring knowledge on the part of Fidel Tukel of the lapse of any registration or approval because the evidence did not establish that the Bruce address, to which the renewal notice was posted, was an address connected with either of Fidel or Baris Tukel. However the primary judge’s inference as to knowledge of the lapse of the registration notice, and of the requirement to file a further annual notice, was not based on the sending or receipt of that renewal notice. Rather, as appears above, it was based on the fact that Stealth had lodged a registration notice in October 2009 and should be taken to have appreciated, as the certificate which was issued indicated, that on 30 September 2010 that registration lapsed. In those circumstances it was also reasonable to infer that at least Fidel Tukel was aware that it was then necessary for Stealth to lodge a further notice in order to remain registered and in compliance with the provisions of the Act.

65. Her Honour did not err in drawing these inferences which were available in the absence of any evidence from Baris or Fidel Tukel to the contrary. Accordingly ground 6 should be rejected.

Whether if the fact of the lapse of registration had been disclosed Calliden would not have insured the premises against property damage at the time of the fire (grounds of appeal 8 and 10)

66. In order to establish its entitlement to reduce its liability to nil under s 28(3) Calliden had to establish on the balance of probabilities that if the fact of the lapse of registration had been disclosed it would not have issued a policy to Stealth, by way of renewal or otherwise, that would have insured the premises and their contents against loss or damage at the time of the fire.

67. Ultimately the issue between the parties in relation to this question is whether had Stealth disclosed the fact of the lapse of registration, it would at the same time have attended to the registration of the brothel (by the lodging of an annual notice as required by s 13 of the Prostitution Act) and thereafter pursued insurance of the property and business with Calliden. The primary judge found that there was no evidence that if the lapse of registration had been drawn to Stealth’s attention it could not have renewed that registration. In the course of argument in this Court it was accepted by Calliden’s counsel that in order to address the registration question all Stealth had to do was “pay $160 and fill in a form”.

68. Had Stealth attended to the giving of a further notice, there was no suggestion in the evidence that Calliden would not have issued a policy, and done so before the fire. The primary judge recorded Ms Shepherd’s position in relation to that subject at Judgment [251]:

In cross-examination, [Ms Shepherd] agreed that if on renewal it had come to her attention that the brothel was not registered, she would have made inquiries. She insisted, however, that if she found that the brothel was unlicensed, the insurance could not be renewed and the application would have been declined. She would have kept a record of the reason, to which she would refer, if a further application was later made when the brothel was licensed and then, a new policy could be issued.

69. The primary judge considered at Judgment [256] that it could not be “inferred from the evidence that Stealth Enterprises would have attended to the registration of the brothel” if it had revealed the lapse of its registration at the time of renewal. That was because her Honour considered that whether Stealth would have attended to compliance with the Prostitution Act was a matter in relation to which it could have called evidence. Her Honour concluded that having “elected not to do so, it is not open now to draw inferences which favour its case”: Judgment [245].

70. This reasoning wrongly assumes that Stealth bore the legal onus of establishing what the insurer’s position would have been if the non-disclosure had not occurred, or that Stealth bore any evidentiary burden in relation to that question. Under s 28(3) the position was that Calliden had to establish that assuming the lapse of registration was disclosed to it by Stealth, it would not have issued any insurance which was current at the time of the fire. That in turn required Calliden to prove, in the circumstances disclosed by the email exchange between OAMPS and Fidel Tukel in mid-October 2011 (see [23] and [24] above), that Stealth would not have paid an additional $160 or so and lodged an annual notice in order to comply with the Act.

71. That action was necessary in order that Stealth “remain on the same insurance with the same details” which was plainly Fidel Tukel’s intention at that time as his email of 16 October 2011 shows. It was action which was neither difficult nor time consuming. Furthermore as the last statement in that email makes clear, at that time Fidel Tukel was prepared to do whatever was reasonably necessary in the way of completing any further forms in order to achieve the renewal of the insurance. Subsequently he committed Stealth to the payment of a significant premium ($8899.84), albeit by undertaking to pay instalments under a premium funding arrangement.

72. In these circumstances there was evidence from which the Court might reasonably and sensibly infer that on the hypothesis that there had been disclosure, the insurer would have been on risk at the time of the fire because Stealth would have remedied the problem of its registration. Certainly the Court could not in the face of that evidence have been satisfied otherwise. It follows that the primary judge erred in finding that under s 28(3) Calliden was entitled to reduce its liability to nil and that ground of appeal 8 is made out.

Conclusion

73. The upholding of ground 4 in circumstances where Calliden does not otherwise support the primary judge’s finding of actual knowledge, has the consequence that there was no breach of the duty of disclosure under s 21 in relation to the fact that Baris and Fidel Tukel were members of the Comancheros bikie gang. The upholding of ground 8 has the consequence that although there was a breach of that duty in relation to the lapse of registration, Calliden has not established that it was entitled for that reason to have its liability in respect of Stealth’s claim reduced.

74. In the result Stealth is entitled to an indemnity under the policy in respect of its claim. It is agreed, in that event that the amount of its insured loss as a result of the fire was $500,000. The parties do not appear to have agreed as to Calliden’s liability, if any, to pay interest on that amount in accordance with s 57 of the Insurance Contracts Act.

75. In the circumstances, the orders which I propose be made include a direction that will enable the parties to address, and if possible reach agreement about, the question of interest on the judgment sum. Those orders are:

1. Appeal allowed.

2. Judgment for the respondent ordered on 3 September 2015 be set aside.

3. Costs orders numbered 1 to 4 made on 12 September 2015 be set aside.

4. Judgment for the appellant against the respondent in the sum of $500,000.

5. Respondent pay the appellant’s costs of the proceedings at first instance.

6. Respondent pay the appellant’s costs of the appeal.

7. Direct the parties to confer and agree, if possible, as to the amount of interest if any payable by the respondent to the appellant under s 57 of the Insurance Contracts Act. Any such agreement is to be recorded in short minutes to be lodged with Meagher JA’s associate within seven days of the date of the making of these orders. If the parties are unable to reach agreement within that time, they are to exchange and lodge with Meagher JA’s associate within a further seven days written submissions addressing that question (those submissions in each case not to exceed three pages) which will then be decided on the papers.

76. WARD JA: I have had the advantage of reading in draft Meagher JA’s and Sackville AJA’s separate reasons, with each of which I agree.

77. I have had some hesitation as to the question whether, in the circumstances of this case, a reasonable person in the position of the insured could be expected to have known that the fact of the association between the insured’s director and general manager on the one hand and the Comancheros organisation on the other was relevant to the insurer’s decision to insure the risk in question.

78. Having regard to what was accepted by her Honour to be a matter of common knowledge, namely that by 2010 bikie gangs, including the Comancheros, were widely known to engage in activity which may result in property damage or personal injury, the fact of such an association could reasonably be expected to increase the risks ordinarily attendant upon the use of premises as a brothel. However, on balance I am not persuaded that a reasonable person in the position of the insured could be expected to know that such an increased risk had not already been taken into account by the insured when it accepted the risk of insuring premises used for that purpose. In that regard, I place weight on the lack of any enquiry by the insurer as to any such association (as opposed to the enquiry relating to disclosure of matters such as criminal convictions).

79. Accordingly, I agree with Meagher JA that the appeal should be allowed and I agree with the orders his Honour proposes.

80. SACKVILLE AJA: I agree with Meagher JA that a reasonable person in the circumstances could not have been expected to know that Stealth’s association with the Comancheros “bikie gang” was a matter relevant to the decision of the respondent insurer (Calliden) to accept the risk of insuring the premises occupied by the appellant (Stealth).

81. At first blush this may seem a surprising conclusion, given that there was evidence that the involvement of bikie gangs in a business may create a risk of harm to the business or to the premises on which it is conducted. However the question posed by s 21(1)(b) of the Insurance Contracts Act 1984 (Cth) (Act) has to be addressed in the present case in the context of the business model of an insurer actively seeking to write policies for “adult industries”, including brothels.

82. Calliden appreciated that the business of conducting a brothel was likely to attract people of dubious repute, who might have an association with bikie groups or other “outlaw” organisations. Calliden, through its employed underwriters, knew in 2011 that members of bikie gangs were involved in the adult industry. Yet despite this knowledge Calliden did not ask Stealth or other proponents any questions about their affiliation with disreputable or illegal organisations. Calliden’s internal guidelines, which had been prepared specifically for the purpose of identifying risks in the adult industry that Calliden wished to insure, did not identify a proponent’s association with a bikie gang or similar organisation as a ground for declining to provide coverage against the risk of damage to property from fire. Nor did Calliden adduce evidence that it had made inquiries about the bikie affiliations of brothel owners seeking insurance coverage or that it had ever declined to cover a person or business with such affiliations.

83. A reasonable person would not necessarily have been aware of all these matters. They suggest, however, that a reasonable person would not be expected to know that an association between a brothel owner and a bikie gang created a risk over and above the inherent risk in insuring a brothel such that the existence of the association would be relevant to the insurer’s decision to accept the risk.

84. As Meagher JA has explained, in view of this conclusion it is not necessary to consider whether the primary Judge erred in finding that Calliden would not have renewed the policy had Stealth’s association with the Comancheros been disclosed. Nonetheless as the issue was addressed in argument it is appropriate to deal with it.

85. The primary Judge found that Ms Shepherd, a commercial underwriter employed by Calliden, was a credible witness. Ms Shepherd dealt with the renewal of Stealth’s policy in 2011 and continued to be employed by Calliden until the date of the trial. Ms Shepherd said that if she had known that Stealth was associated with the Comancheros, she would have declined to renew Stealth’s policy. Ms Shepherd also said that if she had proposed to decline renewal of the policy for this reason she would first have discussed the matter with the underwriting manager, Mr Addison, who was senior to her.

86. There are two matters of particular significance to note about Ms Shepherd’s evidence. The first is that Ms Shepherd acknowledged that she had not been asked to consider what she would have done about renewal of Stealth’s policy had she known of its association with bikie gangs until two days before she gave evidence. She was therefore asked to say what she would have done in a hypothetical situation relating to events that occurred four years earlier. During this period Ms Shepherd could not recall having had any specific conversation with colleagues at Calliden about bikie gangs. She also gave this evidence:

“Q.   Do you agree or disagree with my question? My question to you is, that you haven’t processed any memo, file note, report, letter, anything at all about motorcycle gangs, because it’s never been – during any period of your employment, because it’s never been a matter of concern to you until such time as you heard about this claim?

A.   Yes, I would say that’s correct.”

87. Courts have repeatedly warned about the dangers of evidence as to likely conduct in hypothetical situations where the evidence is given through the “prism of hindsight”. [1] These warnings have generally been given in the context of evidence by injured plaintiffs as to what they would have done had they known of a particular risk which in fact eventuated. Ms Shepherd was not an injured plaintiff, but her evidence had some of the characteristics of hindsight evidence given by injured plaintiffs. [2] It was evidence given in the interests of her employer with the benefit of knowledge that the insured risk had eventuated and that information had come to light which, if known at the time, might have justified Calliden in declining the risk. Evidence of this kind needs to be assessed not simply on the basis of the credit of the witness but also by reference to the objective probabilities.

    1. Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 at [16] (Gleeson CJ); [26] (McHugh J).

    2. Evidence of this kind is now inadmissible in New South Wales in claims for damages for harm resulting from negligence: Civil Liability Act 2002 (NSW), s 5D(3)(b).

88. There would be little difficulty in upholding the primary Judge’s finding if Ms Shepherd’s assessment of what she would have done was supported by Calliden’s underwriting guidelines or practices. But as I have pointed out, Calliden adduced no documentary evidence indicating that it ever considered an association with a bikie gang or similar organisations a particular risk for the adult industry over and above the inherent risks for an insurer in issuing policies for businesses within that industry. Nor was there any evidence that Calliden, before or after 2011, had declined coverage because a proponent had or was suspected to have links with bikie gangs or the like, or even that Calliden had made inquiries about such links. That was so notwithstanding its knowledge of the involvement of members of such gangs, and other persons of “ill-repute”, in that industry. In short, there was no contemporaneous and objective evidence supporting Ms Shepherd’s assessment of her likely conduct in the hypothetical situation she was asked to consider.

89. The second matter to note about Ms Shepherd’s evidence is that she agreed that before making any decision she would have discussed the matter with Mr Addison. As the primary Judge noted,[3] Ms Shepherd said that if Mr Addison disagreed with her she still would have declined to renew the policy if the decision was within her authority. If matters stood there, subject to the issues already raised, it would be clear that the decision whether or not to renew Stealth’s policy was ultimately a matter entirely for Ms Shepherd.

    3. Primary Judgment at [205].

90. It is, however, necessary to consider Ms Shepherd’s evidence in context, including the last question and answer in a critical passage of her cross-examination. The passage is as follows:

“Q.   You said earlier that you never declined a risk without taking it to Sean Addison.

A.   Sorry, I thought you meant permission. I would have discussed it with it [sic], but I wouldn’t have got permission from him. Sorry.

Q.   Well, you would have discussed it with him?

A.   Yes. Yep.

Q.   And if he’d taken a different view, you’d have adhered to his view, wouldn’t you?

A.   Depending on my underwriting authority. If it was within my underwriting authority I would have declined it.

Q.   He’s a level 5, isn’t he?

A.   He is, yes.

Q.   And you’re level 3, aren’t you?

A.   That’s correct.

…

Q.   And if he told you he wanted to underwrite the risk, you would have done it, wouldn’t you?

A.   If it was within my authority to decline and he and I disagreed on something, no. I would have declined it.

Q.   Your manager says “I want to take on that risk” and you say “well, I’m not going to do it.” Is that what you’re saying?

A.   Well, depends if he’s got a risk that is outside – depends if it’s within my authority to do.

Q.   You’ve agreed to take it to him, first of all, haven’t you?

A.   If it falls out of my authority I would have, yes.

Q.   No, you said earlier, you never declined a risk without taking it to him, didn’t you?

A.   I said I would discuss it. Depends – sorry, I’m getting confused with having to refer and get his permission –

Q.   I didn’t say that. I wasn’t suggesting that to you. You said – I’m using your word ‘take it to him’ –

A.   Yes.

Q.   -- by that I mean go and have some discussion or meeting with him about it.

A.   Yes. Yes.

Q.   And the reason you’d do that is because you wanted him to get his opinion about it.

A.   I’d always get his second opinion, yes.

Q.   If his opinion as the manager was different from yours, you would have followed his opinion, wouldn’t you?

A.   Well, depends if it was in my underwriting authority. I could decline it and, if so – yes, I would always talk to him about the clients, but if we disagreed and it was still within my authority, I would decline it.

Q.   If he, as the senior underwriting manager employed in this scheme, said ‘that is a risk I want to take on’, you would have taken it on, wouldn’t you?

A.   Depending on, again, the reasonings behind each of his – and whether it fell within my underwriting authority, but yes. If, generally, depending I guess on his circumstances why – yes, I probably would have.”

91. I interpret Ms Shepherd’s last answer as indicating that if the manager to whom she reported, Mr Addison, gave cogent reasons for accepting the risk and renewing the policy she probably would have acted on his advice. This seems to me what Ms Shepherd was intending to convey in that answer and I also think it accords with the objective probabilities.

92. Ms Shepherd’s practice was to decline a risk only after discussing the matter with her manager. As she acknowledged, Calliden was interested in insuring businesses under its adult industry scheme, including brothels. There was nothing in Calliden’s underwriting guidelines that referred to motorcycle gangs or clubs or bikie gangs, although Calliden appreciated that people of ill-repute, a description which would include members of bikie gangs, were involved in its insurance scheme. Accordingly, the question that would have been raised for discussion was likely to be a novel one, so far as Calliden was concerned. In the absence of guidelines requiring that such a risk be declined, the recommendation of a senior manager to accept would carry considerable weight with a more junior underwriter. After all, on the hypothesis being considered Ms Shepherd would have sought Mr Addison’s advice and guidance on precisely this point.

93. Calliden did not call Mr Addison and gave no explanation for his absence (other than senior counsel’s submission to the primary Judge that it was not necessary for Mr Addison to give evidence). Mr Addison’s absence may not have mattered if Ms Shepherd would have made the renewal decision on her own or if it was clear that she would not have accepted Mr Addison’s advice. His absence also may not have mattered if Calliden’s underwriting guidelines made it reasonably clear that an association with a bikie gang or similar organisation was a ground for declining a risk.

94. As I read Ms Shepherd’s evidence, she was likely to have placed very considerable weight on Mr Addison’s advice. There was no evidence as to the advice Mr Addison was likely to have given. However, as I have explained, there was objective evidence indicating that Mr Addison may have been prepared to take on the risk of renewing Stealth’s policy. To do so was consistent with Calliden’s business plan. The underwriting guidelines did not prohibit renewal of the policy or even counsel caution by reason of an association with bikie gangs. The policy had been in place for a year without incident, and the premium for renewal was not insubstantial. Calliden had never declined a risk in an adult industry because of an association with bikie gangs.

95. Mr Addison’s unexplained absence from the witness box allows an inference to be drawn more readily from the objective facts that had he been asked for advice, he would have been prepared to recommend to Ms Shepherd that Stealth’s policy be renewed. [4] At the least, Mr Addison’s absence makes it more difficult for Calliden to establish on the balance of probabilities that if Stealth’s association with bikie gangs had been known, Calliden would have declined to renew Stealth’s policy.

    4. Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8.

96. For these reasons, I do not think that the evidence supports findings that it is more probable than not that:

• Mr Addison would have recommended against renewal of Stealth’s policy; or

• if Mr Addison recommended that the policy be renewed, Ms Shepherd would have refused to act on that recommendation.

97. I accept the primary Judge’s finding that Ms Shepherd was a credible witness. Even so, when the evidence is considered as a whole, I do not think that the primary Judge could have been satisfied on the balance of probabilities that Calliden, had it been made aware of Stealth’s association with bike gangs, would have declined to renew Stealth’s policy.

98. On the other issues arising on the appeal I agree with Meagher JA. I agree with the orders his Honour proposes.

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Endnotes

Amendments

10 April 2017 - [10] Typographical error corrected

Decision last updated: 10 April 2017