The Facts
Owner of brothel makes claim on insurance policy following fire
On 1 January 2012, there was a fire in a brothel which was run from premises in the Australian Capital Territory. The extent of damage from the fire was such that the brothel had to cease trading.
The brothel was insured under a specialised Adult Industry Insurance Policy which provided cover against property damage, including by fire, and public and product liability.
The insurance was initially issued for the period 3 September 2010 to 3 September 2011 and subsequently renewed for 12 months to 3 September 2012.
After the fire, the company that ran the brothel made a claim under the renewed insurance policy, which was current at the time of the fire.
Insurance company denies liability due to non-disclosure
Under Australian law, prior to entering into the insurance contract an insured has a duty to disclose to the insurer any relevant matter that a reasonable person in the circumstances could be expected to know to be relevant.
The insurer denied liability on the basis that at the time the policy was renewed, the brothel owner had failed to comply with its duty of disclosure.
Expert commentary on the court's decision
Court of Appeal finds in favour of brothel
In the case Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71, the Court of Appeal overturned the Supreme Court’s 2015 decision in Stealth Enterprises Pty Limited trading as The Gentleman’s Club v Calliden Insurance Limited [2015] NSWSC 1270.
The court held that the brothel owner, Stealth Industries, was entitled to an indemnity under its insurance policy, despite failing to disclose its association with the Comancheros bikie gang and the fact that the brothel’s registration had lapsed.
Insured’s duty of disclosure of any relevant matter
Section 21(1)(b) of the Insurance Contracts Act 1984 stipulates that prior to entering an insurance contract, the insured has a duty to disclose to the insurer any relevant matter that a reasonable person in the circumstances could be expected to know to be relevant.
In the case of innocent non-disclosures, section 28(3) of the Insurance Contracts Act entitles an insurer to have its liability reduced if it can be shown that the insurer would have declined to issue the policy if the disclosure had been made.
Stealth Industries not required to disclose association with Comancheros
The Court of Appeal found that a reasonable person could not have been expected to know that an association with a bikie gang was relevant to the insurer’s decision. The Court of Appeal found that even without any association with a bikie gang, the dangers which could ordinarily be expected to arise from operating a brothel included arson, standover tactics, fights and dissatisfied customers.
The Court of Appeal found that an insurer which not only specialised in the insurance of brothels, but actively sought their business, should expect that people with criminal connections, including members of bikie gangs, were likely to be involved in the use of the premises.
Further, there was nothing in the underwriting guidelines of the insurer, Calliden Insurance, which provided evidence to the contrary.
No evidence that insurer had ever denied coverage in similar circumstances
To Calliden’s detriment, its proposal form did not include any questions or prompts requiring the insured to disclose its associations with any particular organisation or activity. In the absence of such questions, the court found that a reasonable person in the circumstances could not be expected to know that such a matter was relevant to the insurer.
Moreover, Calliden did not put forward any evidence that it had previously declined coverage on the basis of actual or suspected ties with organisations such as bikie gangs, or that it had ever asked prospective clients about such ties.
In these circumstances, the Court of Appeal found that disclosure of the association with the bikie gang was not required. Furthermore, the court was not convinced that Calliden would have declined to renew the policy, even if the disclosure had been made.
Non-disclosure of lapse in brothel’s registration
The Court of Appeal found that while it was reasonable to infer that Stealth Industries was aware that the registration of the brothel had lapsed, it did not follow that disclosure of this fact was required.
In order to reduce its liability to nil, Calliden had to establish, on the balance of probabilities, that had the disclosure been made, it would have declined to renew the insurance policy. Accordingly, the Court of Appeal found that Calliden would have had to prove that had the lapse in registration been disclosed, Stealth Industries would not have paid the required fee ($160) and lodged an annual notice in order to maintain its registration.
Email from director of brothel company undermines insurer’s argument
Emails admitted into evidence highlighted that prior to the policy being renewed, the director of Stealth Industries had sent an email to Calliden, saying: “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.”
In light of this evidence, it was held that even if the lapse of registration has been disclosed, there was no evidence that Stealth Industries would have refused to renew the brothel’s registration in order to ensure that its insurance policy was renewed.
Outcomes of litigation are unpredictable
The Court of Appeal ordered Calliden to pay $500,000 to the brothel, as well as paying the brothel’s legal fees for both the Supreme Court proceedings and the proceedings in the Court of Appeal.
This was a starkly different result to the earlier judgment in the Supreme Court, where it was decided that Calliden was entitled to have its liability reduced to nil because of the two non-disclosures by the brothel owner.
No-one ever goes to court believing they are going to lose. Litigants tend to focus on strong arguments in their own favour, often failing to appreciate that the other side’s arguments may be equally strong, and that in the view of the court, the case may be balanced on a knife edge.
The fact that two Australian courts came to opposite conclusions in this case demonstrates how unpredictable litigation can be.