In brief - Court satisfied that insurer would have declined cover had the misrepresentations not been made
On 11 December 2015, the Supreme Court of Victoria published its judgment in Kalabakas v Chubb Insurance Company of Australia Ltd  VSC 705
permitting the defendant insurer to avoid a policy and decline a property claim on the basis of fraudulent non-disclosure and misrepresentation. The Court also found that, regardless of fraud, the insurer was entitled to reduce its liability to nil. Notably, the defendant called no less than eight witnesses, including the broker and their insurance underwriters, in addition to a substantial body of documentary evidence in order to successfully prove its defence.
Property bought at discount on basis of completing it beyond lock-up stage
In August 2007, Mr and Mrs Newlands contracted with a builder to build a three-storey residential dwelling (property). The contract was to build the property up to lock-up stage, with items such as plumbing, wiring and internal finishes still to be completed. A number of structural issues arose on the property following completion up to lock-up stage and the Newlands commenced proceedings against the builder in the Victorian Civil and Administrative Tribunal (VCAT), alleging that the property had not been constructed properly and was structurally defective. In May 2010, the VCAT delivered its judgment, noting that the property was structurally defective and awarding the Newlands the sum of $400,000.
In or around the second half of 2010, Mr Kalabakas (plaintiff) purchased the property from the Newlands for a discounted purchase price on the basis that the plaintiff complete its construction (beyond lock-up stage) (at ).
Plaintiff claims for replacement, contents and demolition costs after property destroyed by fire
On 7 December 2010, the plaintiff insured the property with Chubb Insurance Company of Australia Ltd, and subsequently renewed the policy the following year on 28 November 2011. The insurance was arranged via the plaintiff's broker, who took the plaintiff's specific insurance requirements over the telephone. Importantly, the broker asked the plaintiff a series of questions and recorded his answers on a master quotation sheet. The quotation sheet was then provided to the insurer prior to approving the policy.
On 6 to 7 July 2012, the property was destroyed by fire and a claim for its replacement cost up to $1.4 million in addition to contents ($208,000) and demolition costs ($95,390.20) was made under the plaintiff's insurance policy. The insurer declined the claim on the basis of fraudulent misrepresentations and non-disclosure.
Insurer alleges plaintiff knew of four relevant matters requiring disclosure under Insurance Contracts Act
The insurer contended that the plaintiff had knowledge of four relevant matters prior to renewing the policy which he knew, or alternatively a reasonable person in the circumstances would have known, were relevant to its decision whether to accept the risk and on what terms. These matters included:
- Construction of the dwelling had not being completed as at 6 December 2010 (the date on which the initial policy incepted).
- The dwelling had been the subject of a dispute in the VCAT that related to serious structural deficiencies.
- The structural issues had never been adequately addressed.
- A further building permit was required to complete the construction of the dwelling from lock-up stage to completion but had never been issued and no valid occupancy certificate was ever issued.
The insurer submitted that these matters required disclosure pursuant to section 21(1)
of the Insurance Contracts Act 1984
. Further, the insurer submitted that the failure to disclose these matters was fraudulent and that it was accordingly entitled to avoid the renewed policy from its inception pursuant to section 28(2)
of the Act.
The insurer also contended that the plaintiff made the following fraudulent misrepresentations pursuant to the answers provided in the broker's quotation sheet:
- that the property had been constructed in 2007
- that the property was subsequently renovated with all works completed by 6 December 2010
- that the property was not under construction or renovation
Broker's knowledge is to be treated as the insured's knowledge
Her Honour McMillan J reviewed the principles relating to an insured's duty of disclosure, emphasising that section 21 of the Act applied only to matters "known" by the insured to be relevant to the insurer in assessing risk (at ). McMillan J considered the concept of knowledge and determined that the obligation to disclose something known could only attach to something a person actually had in their consciousness or something that existed in a record or other source of information that the person actually knew about and had access to (at ).
Importantly, McMillan J considered that the knowledge of the insured's broker as to what was relevant to the insurer's decision was to be treated as the knowledge of the insured for the purposes of what was required to be disclosed (at ). In this regard, McMillan J noted the split decision of the High Court in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq)  HCA 25
on the issue of whether an insured could know a matter for disclosure by its agent. However, McMillan J endorsed the basic principles set out by Gyles J in Tosich v Tasman Investment Management Ltd  FCA 377
proposing that the wider view (that an insured can know a matter for disclosure by an agent) be taken pending further clarification by the High Court (at ).
Discharging onus of proof when alleging fraud requires cogent evidence
In cases where fraud is alleged, McMillan J considered that the insurer must show either a deliberate decision by the insured to mislead or conceal something from the insurer, or recklessness amounting to indifference about whether this occurred (at ). Further, McMillan J addressed the onus of proof in fraud cases accepting the principles set out in Briginshaw v Briginshaw
(1938) 60 CLR 336 as cited by Emmett J in Warner v Hung, in the matter of Bellpac Pty Ltd (Receivers and Managers Appointed (In Liquidation) (No 2)  FCA 1123
…The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, and the gravity of the consequences flowing from a particular finding are considerations that must affect whether the fact has been proved to the reasonable satisfaction of the court. Reasonable satisfaction should not be produced by inexact proofs, indefinite testimony or indirect inferences (see Briginshaw v Briginshaw  HCA 34; (1938) 60 CLR 336 at 361–2).
Against this background, McMillan J outlined and examined the substantial amount of evidence produced by the insurer, which included oral evidence from eight witnesses and documents, produced by subpoena, from seven separate sources. Importantly, McMillan J considered that greater weight should be placed on documentary evidence where there were differences between oral evidence and a contemporaneous document (Kalabakas v Chubb Insurance Company of Australia Ltd
, at ).
Plaintiff deliberately failed to disclose structural deficiencies and VCAT proceedings, knew representations were false
McMillan J considered in detail the evidence presented by each of the parties and, in particular, the evidence of the broker's telephone conversation with the plaintiff. McMillan J determined that the plaintiff would have been put on notice of the matters relevant to the insurer's decision as to whether to accept the risk by virtue of the questions asked by the broker (at ). Accordingly, McMillan J was satisfied that the plaintiff knew of the four relevant matters and knew that each of the four matters were relevant to the insurer's decision as to whether or not to accept the risk and on what terms (at , ,  and ).
McMillan J found that the plaintiff's non-disclosure was fraudulent, noting that what the plaintiff had told his broker was deliberate for the purpose of avoiding the disclosure of matters about the structural deficiencies with the property and the VCAT proceedings (at ).
McMillan J also determined that each of the three alleged misrepresentations was made by the plaintiff by virtue of the answers written down on the broker's quotation sheet (at , , ). Further, McMillan J determined that each of the representations was known by the plaintiff to be false, was deliberately left uncorrected on renewal of the policy and was therefore fraudulent (at ).
Court finds insurer entitled to reduce its liability to nil
McMillan J considered the insurer's alternative defence pursuant to section 28(3) and determined that, even if the plaintiff's non-disclosure was not fraudulent, the insurer would nevertheless have been entitled to reduce its liability to nil. In making this determination, McMillan J accepted the evidence of Ms Tran, an insurance underwriter, who gave evidence to the effect that the insurer would have declined to enter into the contract of insurance had the duty of disclosure been complied with (at ).
McMillan J also concluded that the insurer would have declined to cover the risk regardless of whether the plaintiff's misrepresentations in the quotation sheet were made fraudulently. In this regard, McMillan J examined the relevant underwriting guidelines which stated, in effect, that a new risk should be declined where underwriters are advised that a home is undergoing any renovations or to be rebuilt in the next 12 months and that cover should not incept until the house is fully completed with a certificate of occupancy issued (at ).
In conjunction with the underwriter's evidence, McMillan J was satisfied that the guidelines would have been followed and the insurer would have declined cover had the misrepresentations not been made, therefore entitling it to reduce its liability to nil pursuant to section 28(3) of the Act (at ).
Tips for insurers and brokers
- Where allegations of fraud are made, they must be properly pleaded and supported by clear and cogent evidence.
- Contemporaneous documentary evidence will be afforded greater weight in the event of any difference or inconsistency with oral evidence.
- An insurer will need to establish fraud on the balance of probabilities in accordance with the Briginshaw test, as codified in the Uniform Evidence Acts (e.g. Evidence Act 2008 (Vic) section 140(2)).
- Insurers should ensure that underwriting guidelines and policies are regularly updated and are clear and unequivocal.
- If sufficient evidence can be adduced to prove that an insurer would not have entered into a policy had the duty of disclosure being complied with, then the alternative defence pursuant to section 28(3) should be properly pleaded.
- Brokers need to be mindful of their own position and knowledge, as well as the position of the insured, when considering and advising clients as to their duty of disclosure. Brokers should ensure that the answers provided by their client are properly considered and correctly answer the relevant question in an insurer's proposal form in full.