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Focus: Just answer the question – insureds fail to disclose at their peril

20 April 2011

In brief: The Full Court of the Federal Court has upheld a decision in which an insurer's liability to indemnify was reduced to nil on the basis of non-disclosure and misrepresentation by its insured. Partner Michael Quinlan (view CV) and Lawyer Laura Johnston report.

How does it affect you?

  • This decision re-emphasises the importance of an insured's compliance with the duty of disclosure on entering into an insurance policy. 
  • In particular, unless the insurance contract were expressly to provide for it, an insured must disclose relevant information even if it relates to events that occurred long ago.
  • The court will look unfavourably on an insured who, by giving careful answers calculated to avoid disclosing a relevant factor, ultimately misleads a prospective insurer about the risk it presents.

Background

The appellant (the insured) owned a car which it insured with an insurer (the insurer).  One of the nominated drivers of the car was involved in a serious accident while driving the car under the influence of alcohol.  The insurer denied indemnity for the insured's claim on the basis of exclusions covering loss or damage occurring while the driver of the vehicle was under the influence of alcohol.  The insured brought a claim against the insurer for breach of contract.

Before Justice Rares at first instance,1 the insurer argued that the insured had breached its duty of disclosure in its responses to the questions in the proposal form relating to nominated drivers' driving records, in breach of section 21 of the Insurance Contracts Act 1984 (Cth) (the Act).  Mr O'Shanassy, the sole director of the insured, filled out the form in respect of himself and his wife, Mrs O'Shanassy, as nominated drivers.

At that time, Mrs O'Shanassy had twice been disqualified from driving following convictions for driving under the influence of alcohol. The insured disclosed only Mrs O'Shanassy's second conviction, not the first conviction that had occurred three years earlier.  Its primary argument was that the duty of disclosure was limited to a five-year or, alternatively, a three-year period, such that it had no obligation to disclose the earlier conviction.

In filling out the proposal form, Mr O'Shanassy referred to earlier disclosures he had made to the same insurer in respect of other policies.  He alleged that he and Mrs O'Shanassy had had a telephone conversation with a representative of the insurer in relation to these disclosures, during which they were told that period of disclosure for driving convictions and disqualifications was limited to three years.

Justice Rares rejected the insured's arguments, holding that the failure to disclose the first conviction amounted to a misrepresentation and breached the duty of disclosure.  As the insurer would not have written the policy had it known about Mrs O'Shanassy's two convictions and the fact that her licence had twice been cancelled, Justice Rares held that the insurer was entitled under s28(3) of the Act to reduce its liability under the policy to nil.  The insured appealed to the Full Federal Court.

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The decision

In a joint decision,2 the Full Federal Court upheld Justice Rares' decision.  The court rejected the insured's primary argument that a time limit should be read into the question 'Have you or any nominated driver been charged or convicted in connection with intoxicating liquor or drug [sic]?'.  The court found no basis on which to imply such a time limitation, given that other questions explicitly identified a five-year timeframe.

The court also rejected the insured's argument that its answers to the proposal form questions were obviously incomplete such that the insurer had waived compliance with the duty of disclosure.  It held that, as one conviction had been disclosed, an insurer could reasonably assume that Mrs O'Shanassy's full driving record had been disclosed.

Finally, the insured's misrepresentation could not be excused under s26(1) of the Act.  This section protects an insured whose representation – though untrue – was made on the basis of a belief that a reasonable person in the circumstances of the insured would have held.  The appeal court held the insured had not established that Mr O'Shanassy held any such belief.  He gave no evidence at the trial, and Justice Rares had in fact found that Mr O'Shanassy tailored his replies to the questions to avoid disclosing the first conviction to the insurer. Mr and Mrs O'Shanassy knew that the earlier conviction and driving disqualification were relevant to the insurer and had not disclosed them, deciding instead to create a misleading impression by disclosing only the second conviction.  As the appeal court noted, Justice Rares rejected the O'Shanassys' claim that the insurer had told them over the telephone that they need only disclose convictions from the previous three years.

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Comment

The decision reaffirms the importance of full disclosure by a prospective insured.  It indicates that a court will not read a time limitation into a question asked in a proposal form where there is nothing on the face of the question to indicate such a limitation exists.  An insured who is uncertain whether or not to disclose a relevant factor should err on the side of disclosure.  The insured is in an even worse position where, as in this case, the court finds that it has tailored its responses to proposal form questions to keep a pertinent fact from an insurer.

Footnotes
  1. Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 4) [2010] FCA 482.
  2. Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd [2011] FCAFC 53.

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