Key Takeaways

Neon Underwriting Limited (Neon), a UK based Lloyd’s managing agent, failed to persuade the NSWSC it was entitled under s28 of the Insurance Contracts Act 1984 (Cth) to avoid cover for a public liability claim made by the Civic Hotel on the basis that it would have automatically declined cover had the hotel disclosed it had a nightclub in its basement.

Application forms, underwriting evidence and guidelines need to be clear and consistent when setting out both acceptable and unacceptable risks. The mere application of post-contractual ‘lawyerly hindsight analysis’ to vague and inconsistent policy definitions against the multipurpose nature of many of today’s Australian pubs will not resolve uncertainties created by vague application questions and underwriting guidelines.

Brief Facts

In 2010 Universal 1919 Pty Ltd (Universal), the occupier of the Civic Hotel in Sydney’s CBD, took out a public liability insurance policy with Neon. On Universal’s application form was the following question:

‘Do you have’ arranged with a series of yes/no boxes: ‘childminding facilities’, ‘dance floor’, ‘dancing’, ‘live entertainment’, ‘discos’, ‘a cover charge’, and ‘Nightclub’.

Neon’s policy defined a nightclub to be:

…1) Where a premises is licensed as such

Or

2) The premises is not licensed as a nightclub but where dancing is regularly undertaken and the venue is arranged in such a manner as to offer permanent dancing and musical entertainment.

For the avoidance of doubt, in deciding whether any venue would be excluded under this policy, if the venue conducts three or more of the following activities it is excluded:

1. charges an entrance fee

2. employs bouncers or employs security personnel to manage the entrance to the dance premises

3. has special lighting

4. is marketed as a nightclub

5. has insufficient natural light to be able to walk around the premises freely and without difficulty

6. has a permanent sound system

7. has soundproofing 

Regardless as to whether or not any venue operates under the licence of a hotel or motel or other licensed premises such operation is not covered under this policy.

Universal disclosed on its application that it did not have a nightclub at the hotel and also that DJ nights were sometimes organised.

On 16 February 2011, Stephen Legge, fell down the stairs on the way to a bathroom located on the basement level of the hotel, sustaining spinal injuries causing paraplegia. Mr Legge commenced proceedings against Universal and the hotel licensee in July 2014.

Universal and the licensee sought to rely on Neon’s policy of insurance however, Neon refused indemnity on the basis that had Universal disclosed yes to ‘nightclub’ on its application form Neon would not have offered cover. Neon was later joined to the proceedings by cross-claim.

Nightclub and s28

The manager of Universal testified that the basement level of the hotel, known as the Civic Underground, served as a function room with a bar and dancefloor to accommodate various events including private functions, live entertainment, DJs, and jazz and cabaret shows. Universal submitted that its manager and licensee held an honest belief that the Civic Underground was not a nightclub when he completed the questionnaire in the application for insurance.

Neon alleged that Universal ought to have been reasonably aware that Neon would not have insured the hotel had Universal disclosed that some area or room on one or some nights a week corresponded to the policy definition of ‘nightclub’, which was described by the trial judge as rather idiosyncratic.

Neon relied on underwriting evidence it said established that any risk associated with nightclubs was to be automatically and immediately declined, however the judge was not persuaded by the underwriters’ statements, commenting:

[36] On Mr Sommer’s account, the “invariable” practice of refusing to underwrite anything that looked or smelled like a nightclub is simply not consistent with the policy documentation, or the binder, both of which allow for discretionary cover and/or referral to London in certain circumstances.
…
[58] Mr Lawson was not an impressive witness. His evidence was given haltingly, as if he was focused on giving tailored rather than truthful evidence. He prevaricated on important issues. He was unable to describe what would have comprised the “underwriting file” at the time. He was wrong in respect of a number of assertions he had made in his affidavit and in his answers given in cross-examination, such that I was left with the distinct impression that the reality was that no “usual practice” (if there was one), let alone, “invariable practice”, was applied to this renewal at all.

The Court noted several errors between the individual underwriters and against process documents as to what the underwriters were authorised to do, what the underwriters said they were authorised to do and what the underwriters actually did on the hotel’s application, including:

1. that the hotel’s application was referred to Neon in London when this was not required;
2. that the underwriter’s matrix authorised them to write risk for hotels that included a nightclub or nightclub activity, but the underwriters contended they were not authorised to write ‘mixed use’ hotels; and
3. the underwriters admitted to not following their own documented process but instead to simply referring applications up the chain of underwriters.

Judgment

The Court found that, in circumstances where its underwriting matrix allowed for cover for hotels with nightclubs and the underwriters had not followed these guidelines, Neon had not fulfilled its evidentiary onus to establish that it would have automatically and immediately declined to cover the hotel and therefore that Neon was not entitled to rely on s28 to avoid cover.

Importantly, the Court considered that the licensee held a reasonable belief that the hotel was not a nightclub when completing the application form and that this was reasonable in the circumstances, given the mixed use of the hotel, and therefore not a misrepresentation.

In closing the Court noted:

[85] Further, the definition of “nightclub” is bizarre and blurs concepts in a way that introduces confusion. What, for example, comprises “permanent dancing”? Should “permanent dancing and musical entertainment” be considered together? What is meant by “the venue”? What is meant by “premises” in the context of the exclusion? What is meant by “special lighting”? (particularly where, as [the manager] noted, the top floor had “mood lighting”)? How should the indicia be interpreted when the whole premises was monitored by security guards? The potential questions arising from the vagaries of expression in the “nightclub” definition are almost endless.

The Court also considered that s26 would protect the hotel manager as when he completed the application form:

[88]…his belief that there was no “nightclub” was genuinely held by him, with valid reasons, and I accept that a reasonable person in his circumstances would have held the same view, given the mixed use premises, the varying use of the basement depending on the night of the week and what, if anything, was booked to occur there, and the clumsy and confusing “definition” and status of “Nightclub” in the Policy documents.

Implications

Efforts to confine cover by narrowly construing vague policy definitions in support of reliance on s28 will require insurers to adduce clear underwriting evidence in disputed claims.

This decision highlights the extent of the evidentiary onus that underwriters will bear when an insurer seeks to rely on s28. The underwriter will need to demonstrate that they have established and documented underwriting procedures and that the processes around them are followed.