Which case won?

casea
The case for the insurer
  • The company that ran the brothel did not disclose that its sole director and manager were both members of a bikie gang. Disclosure of this association was relevant and would have affected our decision to accept the risk of insuring the appellant’s premises against property damage and public liability.
  • In our view, an association with an organisation like a bikie gang would have increased the risk of property damage, because such organisations are commonly involved in gang rivalry and acts of retribution, which may result in property damage.
  • We would have associated the bikie gang with illegal activities, which may have increased the risk of an insured event occurring, particularly property damage. For these reasons, we would have declined to renew the insurance policy had the association been disclosed.
  • Furthermore, the company failed to disclose that the brothel’s registration under the ACT’s Prostitution Act 1992 had lapsed due to a failure to lodge an annual notice. Had the company made this disclosure, we would have declined to renew the policy.
  • The company’s failure to comply with its duty of disclosure entitles us to reduce our liability to nil.
caseb
The case for the brothel
  • If we were required to disclose affiliations with bikie gangs or the like, this should have been clearly stated on the insurance proposal form, but it wasn’t. We had no idea that the association with a bikie gang was relevant to the insurer’s decision to accept the risk of insuring the brothel’s premises.
  • An insurer offering an insurance policy specifically targeted at the adult industry should expect that people with criminal connections, including members of bikie gangs, are likely to be involved in the use of the premises.
  • The association with a bikie gang did not create an additional risk that would not have otherwise been present, given that the premises were being used as a brothel.
  • The insurer’s own guidelines did not identify an association with a bikie gang as grounds for declining to provide insurance coverage. There was no evidence that the insurer had ever declined coverage on this basis, or even that it had ever made enquiries of other prospective clients about such associations.
  • We were also not aware that the brothel’s registration had lapsed. Had we been aware of it, we would have renewed it.

So, which case won?

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Case A Case B

Case B won. You were right!

How people voted
a34%
b66%

Expert commentary on the court's decision

Rita LahoudParalegal
“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.”
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.

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