GIO v. Wallace

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DMC/INS/18/01
GIO General Ltd v Wallace
New South Wales, Australia, Court of Appeal: Priestley, Heydon and Hodgson, JA: [2001] NSWCA 299: October 2001
General insurance: Insurance contracts: Duty of disclosure: Residential premises insured: increased used of Business premises led to increased risk: Whether insured breached duty of disclosure: Whether insurer breached duty to inform insured of duty of disclosure
Summary
In this case, the insurer denied indemnity for a property fire because the insured failed to inform it that the premises’ use for a wood-chipping business had increased. The court considered the standard of disclosure required by s21 of the Insurance Contracts Act 1984 (Cth) and the timing of the insurer’s obligation to inform the insured of its duty of disclosure under s22 of the Act.

Case Note contributed by Matthew Harding, partner, and Paul Kosterman, lawyer, at Ebsworth & Ebsworth Lawyers. Sydney. Ebsworth & Ebsworth Lawyers are International Contributors for Australia.

DMC Category Rating: Confirmed

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Facts
From December 1987 to December 1998, the insured’s (Mr. Wallace’s) premises were insured under a home building insurance policy by GIO, the insurer. The proposal stated that the property was used as a "private home" and that part of the home would be used for business purposes for "storage of equipment only". From 1992 the use of the premises for the insured’s wood-chipping and tree-surgeon business increased significantly. This involved the movement of machinery and inflammable liquids onto the premises and also storing and selling wood from those premises.

In late 1992 or early 1993, the insured received threats from a former employee and other anonymous threats. The insured contacted the police, his solicitor, his insurance broker and an accountant, but not the insurer. In February 1994 the wording of the insurance policy was revised and the insurer sent a copy of that revised policy to the insured in December 1994 with the annual renewal notice.

In 1995 the property was damaged by fire. The insurer denied any duty to indemnify on the basis that the insured had breached his duty of disclosure under section 21(1) of the Insurance Contracts Act 1984. Under s21(1)(a), before the relevant contract of insurance is entered into, an insured has a duty to disclose every matter that the insured knows to be relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. The full text of the section is as follows:
"21(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:

  1. 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
  2. a reasonable person in the circumstances could be expected to know to be a matter so relevant."

The trial judge held that the insured had not breached s21(1), while the insurer had breached s22(1) of the Act as it had not clearly informed the insured in writing of the general nature and effect of the duty of disclosure as required under that section. The section reads:
"22(1) The insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure and, if section 21A applies to the contract, also clearly inform the insured in writing of the general nature and effect of section 21A."

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Judgment
The Court of Appeal reached a unanimous decision in allowing the appeal, with Heydon JA delivering the leading judgment.

The Court said that for the insurer to succeed on appeal from the s21(1)(a) findings it would be necessary for it to identify admissions by the insured which, when taken with the rest of the evidence, supported the inference that he would have known that the insurer would regard such matters as relevant. After examination of the evidence, the Court was not persuaded by the insured’s answers in cross-examination that he did not have the relevant knowledge.

The Court accepted the insurer’s submission that s21(1)(b) of the Insurance Contracts Act applied. The Court pointed out that the sub-section looks not to what the insured knows, but to what a "reasonable person in the circumstances could be expected to know". Further, in judging what a reasonable person could be expected to know, it is necessary to take into account the circumstances affecting the actual insured. However, the ultimate question turns on what could be expected of a reasonable person’s state of mind, not the insured’s state of mind.

The Court found that expanding the business in a way which increased the risk of fire (through stockpiling wood) was a matter which a reasonable person could be expected to know to be relevant to the insurer’s decision whether to accept the risk.

The threats against the insured and his property were also considered a matter which a reasonable person could be expected to know to be relevant to the decision of the insurer whether to accept the risk on each renewal of the policy. Further, the threats were considered serious enough to frighten the insured and cause him to report them. In those circumstances, the Court found a reasonable person could be expected to know that these things were also relevant to the insurer’s decision whether to accept the risk.

The Court rejected the insured’s arguments concerning the s22(1) requirements for the insurer to clearly inform the insured of a duty of disclosure "before a contract of insurance is entered into". Heydon JA said that there was a history of dealings between the two parties from 1987 onwards relating to the insurance of the premises. This was effectuated through a series of contracts – some of them variations, some of them renewals. He said this was effectively a single course of dealings and at the beginning it was beyond question that the insured was clearly informed in writing of his duty of disclosure in two ways: namely the proposal which he signed and the terms of the 1987 policy. Further, Heydon JA said that the 1994 policy referred to the first component of the contract of insurance as being "your proposal", and the only proposal received by the insured was the 1987 proposal.

Hodgson JA agreed with Heydon JA that s22(1) does not require the insurer to inform the insured of the duty of disclosure at any particular time before the contract of insurance is entered into. However, he said the fact that this has occurred at some time in the past does not necessarily mean that s22(1) has been complied with. In considering whether the section is satisfied, the whole history of information exchange can be examined by the Court.

Comment
This case highlights the commonsense approach by the Courts when considering the test of disclosure, required under s21 of the Insurance Contracts Act, of what a reasonable person in the circumstances of the insured could be expected to know, rather than what the insured knew or would know.

It also illustrates that the insurer’s obligation under s22 of the Act to inform the insured of its duty of disclosure is not limited to a requirement that it take place at any particular time and that the court may examine the entire history of dealings between the insured and the insurer.

 

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