A recent decision of the Federal Court of Australia has highlighted the importance of making all relevant disclosures in the course of applying for an insurance policy, and the repercussions that the withholding of such disclosures may have on the enforceability of the policy.
Delor Vue Apartments were built in 2008-2009 in Queensland, and following completion, building defects relating to falling eaves, were identified posing a significant health and safety risk due to the potential for injury. Rectification works commenced to address the defects.
During the course of the rectification work, the Body Corporate (the QLD equivalent of an Owners Corporation) engaged a broker to enter into an insurance policy for property damage and public liability. Throughout the application process, the broker made the Body Corporate generally aware of their duty of disclosure, however the Body Corporate was not asked, nor did it disclose that the building contained defects that were in the process of being repaired.
The policy was issued and commenced 23 March 2017. On 28 March 2017, Tropical Cyclone Debbie struck, causing significant roof damage to the building, damage which the Body Corporate proceeded to claim under their insurance policy. In the course of the claim, the Body Corporate complied with the insurance investigation, including providing copies of all prior reports and investigations into the roofing defects. The insurer initially flagged that non-disclosure issues may apply, however on 9 May 2017, the insurer informed the Body Corporate that it would honour the claim, despite the presence of the non-disclosure issue, whilst outlining its intention to rely on policy exclusions to exclude cover for components of loss relating to the rectification works.
The Body Corporate and the insurer each obtained engineering and building reports to determine the scope of works required to rectify the damage and to determine which work would be paid for by each party. As a result of these reports, more extensive defects were discovered, leading to a disagreement between the parties as to the scope of works and subsequent payment required. The Body Corporate sought clarification from the insurer as to the terms of their coverage claiming that the insurer was handling the claim in contradiction to the code of practice and the duty of good faith. The insurer offered to pay $900,000 of the damage, excluding $3.5m of damage deemed to be a result of the pre-existing defects to settle the claim, stipulating a timeframe for acceptance, after which they would proceed to reduce their liability on the basis of the non-disclosures.
The Court held that a reasonable person in the Body Corporate’s position would have known that a prospective insurer would have been interested in being made aware of the existing defects when considering the policy and that in failing to make the disclosure they were in breach of the Insurance Contracts Act Cth. It was held that the insurer was entitled to rely on the non-disclosure to reduce its liability, however this entitlement was waived by the insurer in emails with the Body Corporate and they therefore were prevented from retracting this waiver and reducing their liability.
This decision highlights the importance of making all relevant disclosures in the course of applying for insurance policies and the ability for insurers to be held to their interim decisions, such as waiving non-disclosure issues, if they seek to later retract such decisions.
Article by Zachary Sie and Allison Benson.