QUESTION
a) Given the above information, what is the duty of disclosure required by the Insurance Contracts Act 1984 (Cth) of both Allinsurance and Jason? That is, what must Allinsurance tell/ask and how does Jason assess what information he has to disclose? In your answer explain the effect of the relevant sections of the Act and use one case as illustration. (15 marks)
b) Assume that Jason fails to mention that he will be renting a room or that he will be making food to sell at a market. The only question Jason saw that might have been relevant was ‘do you intend to use the premises for business purposes?’ Jason answered ‘no’. One day Jason finds that someone has broken down the door to the outside shed in which he has been storing the jam and has caused $4000 damage. Jam worth around $500 in total has also been stolen. Allinsurance is refusing to pay up on either of the claims because Jason hasn’t made full disclosure. Is this correct? Does the company have the right to reject the claim? (Refer to ss 28 and 31 of the Insurance Contracts Act 1984 (Cth)) (12marks)
c) Assume that Jason also discovers that his tenant has been growing marijuana in his bedroom and water has dripped onto the carpet, causing $5000 of damage. Allinsurance is also refusing to cover this damage on the basis that Jason was responsible for illegal activities being carried out in the house. Is this correct? Does the company have the right to reject the claim?
SOLUTION
A) The facts of the case states that Mr. Jason approaches Allinsurance, insurance company for insurance over a house he is renting. He discloses that he would be using the house as income and that extra income would be made when a fellow student rents one of his rooms(against the terms of the contract he had signed with his landlord). Also, we gather that Jason is planning to make jam to sell in the market. Now we need to assess as to what are the facts that are needed to be disclosed by Jason in getting insurance and also what facts the insurance company have to provide to Jason, it is essential that we can present all these facts with the help of Sec 21 & Sec 22(1) of the Insurance Contract Act 1984 which states that it is duty of the insurer to disclose all the facts to the insurance company before entering into an insurance contract with that company. He has to provide these facts such that the insurer (who is providing insurance) can assess what risks are involved by entering into this contract and also on the basis what terms. In short the disclosed facts are those facts which have to be known by a reasonable person. Here the insurance company is giving insurance to a house rented from Jason so it must know the fact of the actual owner and the purpose for renting the house, he may not know the facts which may reduce the risk or which are waived by the insurer. In the given case Jason discloses that he would be renting the house and the additional income to be received from a co-student. Not only the insured it is even the duty of the insurer to disclose all the facts relating to the insurance the insured has entered into. This rule is determined under sec 34 of the Insurance Contract Act (ICA). It is essential that the insurer gives all the details of the insurance cover and also what are the provisions of the proposed insurance contract and also the sub section of Sec 34 of ICA state that the insurer is not liable for those claims that the contract does not provide insurance cover in respect of the happening of such event. To understand much better the concepts of these facts we can interpret through the case of Merilyn Kaye Marsh with CGU Insurance Limited t/as Commercial Union Insurance. In the given case the plaintiff Marsh owned and occupied a house damaged by katherine flood where the river directly flowed into the premises. Plaintiff claims damages for the loss suffered by her, but the defendant claims that floods were not part of the provisions of their insurance cover and that the defendant cannot claim insurance compensation for the flood damage. The regulations discussed in the case were regulation 13 and 14 which state that home based contract is a contract in which flood is a prescribed event as per sec 35(1) along with 35(2) of the ICA where the defendant is liable to indemnify the plaintiff against the damage of flood. But as per the interpretation (Standard Venetian Blind Co. v. American Empire Ins. Co, 1983) clause under the insurance cover claimed by the plaintiff it does not include the concept of recovery for flood damages and special applications are available if there is necessary if the plaintiff needs such cover. As per the disclosure clause the insurer did disclose all the facts of the insurance claim the insured is claims has been disclosed and the insurance company even mentioned a note that if there is any need for securing against flood damages then the insured can ask for other insurance coverage available, because under the insurance scheme there are many schemes available for the insured as per his requirement or choice thus the claim of the plaintiff was dismissed. Therefore, it can be observed that under the Insurance act the disclosure of the facts is very essential and lack of disclosure of the facts may result in further issues. Thus, as per the given facts of the case it is very much important that the facts of the claim are disclosed by the insurance company to the insured and also the insured should disclose his needs to the insurer such that in the event if happening of that damage he can claim insurance for it and does not have to suffer the loss. Under ICA interpretation (Sec 11 ICA, 1984) and disclosure of the facts are very essential from the benefit of both insurer and insured (Issue 46, 2005, Financial Ombudsman).
B) As per the facts of the case Jason fails to disclose the fact that he would be renting a part of his rented home to co-student which is against the norms of the lease entered with the landlord. He also forgets to disclose that he would be using the rented house for business purpose and when questioned he said that he would not be using it for business purpose, later when he incurs damages then he claims from the insurance company to compensate for his damage, the insurance company denies it because it feels that Jason while entering in to the insurance contract did not disclose the fact that he would be using it for business purpose and nor that he had rented a portion of it. As per the regulations of ICA Sec 21 it is essential that the insured should disclose all relevant fact to insurer such that he can benefit from it. Sec 28 of the ICA states that insurance on house which is a general insurance and this sec applies only when the insured fails to disclose all the facts and also there is misrepresentation made by the insured to the insurer before entering in to the contract. As per the observations of the case the insurance company may avoid the payment claimed by Jason because he had made fraudulent and misrepresentation (Lambert v Co-operative Insurance Society Ltd, 1975) of the contract by not disclosing the relevant factors to the insurer. If in case the insurer is not entitled to avoid the contract then his liability would be reduced to such an amount which would place him in the position he would have been if the fraud or misrepresentation would have not been made. But the court may disregard the effectiveness of sec 28 that is helping the insurer in not making payment for the damages not disclosed to him. Under sec 31 of the ICA the court may in any proceeding of the insured in respect of the insurance contract which have been avoided on the grounds of fraudulent failure because of disclosure of the facts or by misrepresentation the court may if it think it is not harsh allow the insured to recover whole or part of claim. The power of this sub section is applicable only if the insurer has been prejudiced, that the prejudice is minimal or insignificant. Thus under the regulations of sec 31 the insurance company could be bound to pay the insurance money because the damage is minimal and insignificant. Also, the insured should remember that this power of court under sec 31 is only conferred to the loss that is subject to proceedings before the court and any disregard by the court of the avoidance does not operated to reinstate the contract. As per sec 28 of the act the insurance company can reject the claim as there is misrepresentation of facts by Jason, but as the damages of the claim were minimal for the insurance company so under sec 31 of the act they can make payments to Jason but on a warning notice for not disclosing the fact and also that they can claim minimal damages such that this does not happen again. It is true from the insurance company point of view for not disclosing the facts to the insurer. In this misrepresentation the insured did not also disclose the fact that he had rented a co-student against the norms of the lease contract with the owner thus, damages occurred because of the co-renter cannot be claimed and even the business loss but as it is minimal it has been considered. It may be confusing when referring to both the sections simultaneously but under conclusion the subsection 4 of sec 31 gives even the court to stop the insurance payment if the court feels that the misrepresentation has to be considered and the avoidance of payment has to be dismissed. As already understood in the first problem it is for the benefit of the both parties to disclose the facts and avoid misrepresentation of facts while entering the insurance contract under the norms of ICA. Here, if we take into account the regulations of Sec 32 under the non-disclosure of facts there are essential remedies available to the insured. But as per the observation of the facts there was misrepresentation before entering into the contract thus the insurance company has the right to avoid the insurance claim from Jason.
C) Under the final questioned circumstances, it can be alleged to be a serious offence because there is no remedy available to insured if the facts were misrepresented before entering in to contract and also that statements made by him were incorrect. Here the serious offence is that Jason did not disclose the fact that he has rented a portion of his house to a co-student, that to he had rented it against norms of the rental contract entered by him with the landlord and now he is even liable to the landlord if there is any damage to the property made by the co-student. The issue in question is that the co-student who rented a portion of Jason house was growing marijuana in his bedroom without the knowledge of Jason and as per law growing of marijuana is a crime. As he did not disclose the fact to the insurance company that he had co-rented his house to another student. As the fact of his presence was not disclosed to the insurance company the insurance company denies the payment of the damages incurred to the carpet because they feel that Jason is involved in illegal activity and those activities against law cannot be claimed for insurance. If the insurance company gives compensation then they would be liable before the law as the act of the co-renter of Jason is a criminal activity and thus cannot be accepted by the norms of the insurance companies or the regulations of the ICA. Thus, as per the facts of the given case it is very essential that the insured discloses all the facts when entering into the contract of insurance and avoid other ways of earning regular income. Here Jason cannot even claim any compensation from the co-renter because the activities of the co-renter were illegal. Falling under the illegal activities, Jason even though is ignorant of the happenings of the illegal activity cannot claim the insurance for the damage as he has to disclose the facts of the damage to the company and if he discloses the reason behind the damage then the insurance company cannot make the payment because the reason for damage of carpet is because of the illegal activities (Flomerfelt v. Cardiello, 2009). Therefore, Jason should have been very careful when entering into contract with his fellow student, and should have made it clear that no illegal activity is allowed in the house. Also, he should have even confided it with his landlord and also explained the reason behind the need of the co-renter. Now coming to issue from the insurer point of view he has no requirement to pay the insurance damage to Jason because the insurance company feels that he is involved in and is responsible for illegal activities. Also, Jason has to have his co-student leave the house and claim compensation for the damage he had done to the carpet. Thus, as per the regulations of the ICA under the given circumstances the insurance company is not required to make payments for the damages related to this particular issue because Jason did not disclose all the facts to the insurance company and also that he himself was ignorant of the fact that his friend was involved in illegal activity. Thus, it is right for the insurance company to not make the payment to Jason for insurance damage as per regulations of ICA.
REFERENCE:
- Commonwealth Consolidated Acts; Insurance Contract Act, 1984 – Sec 11, 13, 14, 26, 35; http://corrigan.austlii.edu.au
- ICA http://www.comlaw.gov.au/Details/C2004C00163
- Australian Insurance Contract Law: Out of the chaos – A modern, just and proportionate , The Hon. Michael Kirby AC CMG (With major assistance by James Morse) reforming statute
- ALRC 20 at [184]
- Suncorp General Insurance Limited v Chiehk
- Joel v Law Union & Crown Insurance Company [1908] 2 KB 863; FMB/LI 0274 Non-Disclosure of Pre-Existing Illness; Financial Media Bureau – Case review Insurance; http://www.fmb.org.my
- Marsh v CGU Insurance Limited t/as Commercial Union Insurance [2003] NTSC 71
KA72
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