Brothels, Bikies and Non-Disclosure

In the recent case of Stealth Enterprises Pty Ltd t/as The Gentleman’s Club v Calliden Insurance Limited [2015] NSWSC 1270, the New South Wales Supreme Court found that the insured company (Stealth), which operated a brothel in the ACT known as “The Gentleman’s Club”, had breached its statutory duty of disclosure by failing to disclose to its insurer (Calliden) that:

1. at the time of policy inception and also at renewal, Stealth’s sole director (Baris Tukel) and also the brothel’s manager (Fidel Tukel) were members of an outlaw motorcycle gang, in this case the Comancheros (“the OMCG Membership”); and
2. at the time of policy renewal, the brothel was no longer registered under the Prostitution Act 1992(ACT) ( “the Non-Registration”).

Facts

Stealth had obtained cover from Calliden for fire and business interruption for the brothel in 2010. This policy was renewed in 2011.

On 1 January 2012, the brothel premises were damaged by fire, which resulted in the brothel ceasing to trade. Stealth made a claim under the policy for business interruption, which was subsequently denied by Calliden on the basis of the non-disclosure of the OMCG Membership and the Non-Registration. The fact that Calliden had, at all relevant times, notified Stealth of its obligations to give disclosure was not in issue.

Issues

Both the inception and the renewal were governed by the duty of disclosure contained in s21 of the Insurance Contracts Act 1984 (Cth) (ICA). The onus was on the insurer Calliden to establish the alleged failures to disclose under s21, and also its entitlement to the remedy sought under s28 of the ICA.

In essence, in considering the application of s21 of the ICA, the questions for the Court to determine were whether the OMCG Membership and Non-Registration were matters:

1. relevant to the decision of the insurer to accept the risk; and
2. that a reasonable person in the circumstances could be expected to know to be a matter so relevant.

Outcome

Ultimately, her Honour found that:

1. on the evidence, it was clear that the OMCG Membership and the Non-Registration were matters relevant to Calliden’s decision to insure (in light of the increase in risk to the insurer as a result), and a reasonable person in Stealth’s position could be expected to know this; and
2. as such, despite no specific question being asked in the proposal, Stealth should have disclosed the OMCG Membership and (at time of renewal) the Non-Registration, being information which was within the knowledge of Stealth at the time; and
3. had the necessary disclosures been made, the policy would not have been issued nor been renewed. Therefore, under s.28(3) of the ICA, Calliden was entitled to reduce the claim to ‘nil’.

Lessons

It should be noted that, although successful, the evidentiary burden placed on Calliden to obtain this outcome was significant. In an attempt to avoid such disputes, or assist in proving one’s case, it is important that an insurer:

1. ask, where possible, specific questions in its insurance proposal with respect to all issues which are relevant to its decision to insure; and
2. have specific written underwriting guidelines in place, which are invaluable in assisting an insurer to prove what risks it would and would not have covered should it seek to obtain a remedy under s28 of the ICA.