Contract of building insurance…demolished!
Bergman v CGU Insurance Ltd  VSC 81 (Decided 9 March 2016)
The Supreme Court of Victoria has dismissed a claim by the owner of a residential building, against an insurer, for the cost of reinstatement of the building as a result of damage caused by a fire. The decision has serious implications for property purchasers and existing owners intending to demolish their building, whether in the immediate future, the medium future, or the long term future – literally at any time in the future.
The facts – Non-disclosure and Misrepresentation
The owner had purchased the property in 2010 with the intention to demolish it and replace it with a new home “as soon as he conveniently could”, whilst leasing it out as a rooming-house in the meantime. However, when taking out landlord’s insurance at the time of the purchase, the owner signed a “New Policy Declaration” in which, in effect, he responded “No” to a question as to whether the property was to be demolished. The policy was subsequently renewed annually for the next three years, the final year being from 2013 to 2014. No insurance declarations were signed by the owner at the time of each of the renewals. However, the renewal invoice for 2013/2014 included a section headed “DUTY OF DISCLOSURE”, which stated that a renewal of insurance was a new insurance contract, and the insured was required to tell the insurer anything that he knew, or should know, could affect the insurer’s decision to insure the insured. The owner did not disclose to the insurer any intention to demolish the premises. He testified that it did not enter his mind to do so because he did not think it was relevant. Furthermore, the development plans were on hold at the time.
The facts – plan for demolition and construction of new home
Over the period of almost four years following its purchase, the property was tenanted and used as a rooming-house. During that time, the owner procured plans to be drawn for a new home, and obtained costings for the construction project. He made tentative enquiries in relation to the amount of finance he would need, and who might be prepared to provide the finance.
From about October 2013 until May 2014, the proposed project was on hold whilst the owner and his wife inspected other possible homes to purchase as a cheaper alternative to building a new home. This was the position at the time of the 2013 renewal, and for several months following. No alternative home was found. Eventually plans were obtained to build a smaller and cheaper home, and discussions commenced with a finance broker to obtain funding for the construction. A demolition permit had been obtained prior to the 2013 renewal.
The fire – the claim
On 17 September 2014, the buildings on the property were substantially damaged by fire. The property had been vacant for the previous two days as part of preparations to demolish the buildings before commencing building works for a new home. After the fire, the owner changed his mind about demolition, and decided that he wished to repair the premises. The owner made a claim under the policy for the cost of rebuilding or repairing the damaged portions of the buildings “to the same condition as when they were new”. The defendant denied the claim, and the plaintiff sued to enforce the policy.
The Court found, on the balance of probabilities, that the plaintiff would have authorised demolition of the buildings if the fire had not occurred, notwithstanding that he did not have a final building contract or finance commitment.
What was plaintiff’s intention regarding demolition at the 2013 renewal date?
The first issue for determination was: What was the plaintiff’s intention regarding demolition at the 2013 renewal date? The Court reviewed the evidence which strongly indicated the plaintiff’s intention from the time of purchase onwards to demolish the buildings for the purpose of building a new home. The Court found that the plaintiff’s intention regarding the project at the 2013 renewal date was that the project was “on hold” while he considered the possibility he might find and purchase an alternative residence, but that he had not abandoned the project altogether, and the prospect that he would proceed with it in the policy period therefore remained.
Was there a relevant non-disclosure – Section 21(1)
The next issue to be determined was: Was the plaintiff’s failure to disclose his intention regarding demolition at the 2013 renewal date a relevant non-disclosure?
The Court referred to section 21(1) of the Insurance Contracts Act 1984 (Cth) (“the Act”). That section sets out the insured’s duty of disclosure, and in summary it provides that an insured has a duty to disclose to the insurer before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms, or which a reasonable person in the circumstances could be expected to know to be a matter so relevant.
As to the relevance of the plaintiff’s demolition plans, the Court found that existing plans (as well as existing statutory orders, where applicable) to demolish insured buildings are relevant to the risk. There were several reasons for this. First, a property owner was likely to spend less money to maintain a rental property which he intends to demolish. This might lead to lack of proper maintenance, or where required, a failure to replace (among other things) faulty electrical wiring or gas pipes, or fixed appliances such as hot water services or ovens, which will obviously increase the risk of fire damage, as well as a leaking roof which will obviously increase the risk of water damage. Second, any period of vacancy while a property is being prepared for demolition will increase the risk of vandalism, especially where the buildings are derelict or not properly maintained. Third, the defendant insurer’s 2012 underwriting guidelines which were in place at the renewal date contained detailed information and directions to officers responsible for accepting risk which clearly indicated that demolition was relevant to the risk. It stated that among the risks which were unacceptable, were a property subject to any demolition plans or statutory orders.
The Court considered that the reference to “any demolition plans” was broad, and captured any plan to demolish, including any existing “project” or “scheme” of the proposed insured to demolish in the future, and any reasonable underwriting officer would have no difficulty in understanding that that was so. The defendant called evidence from its officers to support those matters, which the Court accepted.
The Court postulated that the question for determination was whether the plaintiff’s intention regarding the project, at the 2013 renewal date, was relevant to the risk, and was required to be disclosed. On the latter point, the Court held that there was a fresh duty of disclosure at the 2013 renewal date, and the insured knew that was so.
As regards the plaintiff’s intentions, he sought to argue that as he had put the project on hold at the 2013 renewal date while he looked for an alternative property to purchase, it was likely that some other outcome would have eventuated whereby the property would not be demolished.
The Court’s findings were that there was always a real, and not remote, prospect that the project would proceed, and it was never abandoned, so the prospect of demolition inherent in the project remained. Those matters remained relevant to the risk at the 2013 renewal date. The fact that an insured’s intention to demolish is subject to the occurrence of contingencies would not necessarily convert that intention into a mere possibility which could be considered irrelevant to the risk undertaken by the insurer. However, in a case such as the present, where the intention to demolish and commence a re-building project was dependent upon the ordinary risks facing a person who purchases a residential property with a realistic intention of demolishing the existing buildings and building a new home, the intention to demolish was a real intention and not a mere possibility which might be irrelevant to the insurer’s risk. This was especially so where, as here, the proposed insured had taken significant steps to implement that intention.
Knowledge of the risk
The next question to be determined was whether the plaintiff knew, or a reasonable person in the circumstances could be expected to know, that the intention to demolish as at the 2013 renewal date was relevant to the risk, as required by section 21 of the Act.
The Court rejected the defendant’s submission that the plaintiff had actual knowledge that his intention was relevant to the risk. However, the Court found that before entry into the initial policy and at each renewal date thereafter including the 2013 renewal date, a reasonable person in the same circumstances as the plaintiff could be expected to have known that the prospect that the project, and thus demolition, would proceed, was relevant to the risk. The Court referred to all the circumstances established in the case which a reasonable person would have known such as the presence of the demolition question in the declaration in connection with the initial policy, the higher risk carried by properties which are to be demolished, and the plaintiff’s specific financial and domestic circumstances.
The Court held that by failing to disclose the prospect that he would proceed with the project, the plaintiff breached his duties under section 21(1) of the Act.
What was the meaning of the demolition question?
The next issue for determination by the Court was: What was the meaning of the demolition question in the original Declaration submitted on behalf of the plaintiff to the insurer at the inception of the policy? That question was as follows: Is the property undergoing renovations over $75,000, OR, under construction, OR, to be demolished? (Emphasis added) The Court rejected the plaintiff’s argument that this question should be understood to be enquiring as to whether the property is definitely to be demolished in the imminent future, and that it was not directed at beliefs or predictions that demolition may occur at some future time. The Court referred to the fact that the question was an open question without any time limitation and was asked in the context where demolition was relevant to the risk. The Court noted that the question did not ask whether the buildings were to be demolished during the policy period or by any specified time. It countenanced an intention to demolish well outside the policy period.
Does Section 23 apply? Was there ambiguity?
On that basis, the Court was required to consider the plaintiff’s reliance upon section 23 of the Act dealing with ambiguous questions, which in substance provides that where a statement is made in answer to a question asked in relation to a proposed contract of insurance, and a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have, that meaning should, in relation to the person who made the statement, be deemed to be the meaning of the question.
The Court held that the demolition question should be given its natural meaning, and that accepting for the purposes of argument that the demolition question was ambiguous, the Court was not satisfied that the plaintiff had any proven understanding, apparent or otherwise, of the question. He could not specifically recall having read the demolition question or giving it any meaning.
Was the answer a misrepresentation?
The Court concluded that the demolition question asked the plaintiff whether there were existing circumstances under which the buildings on the property were required or intended to be demolished in the future.
On that basis, the Court found that the plaintiff’s answer (“no”) to the demolition question contained a representation to the insurer that he had no existing intention to demolish the buildings on the property in the future.
Moreover, that representation was, at the time the plaintiff signed the Declaration and at each renewal of the policy including at the 2013 renewal date, wrong. Accordingly it was a misrepresentation when made, and, if a continuing representation at the 2013 renewal date, a misrepresentation at that date also. The Court found that the representation was a continuing one at the 2013 renewal date because it remained false and relevant to the risk.
Does Section 28 apply so as to avoid or reduce the liability of the insurer to nil?
It then became necessary for the Court to consider whether section 28 of the Act applied to any such non-disclosure or misrepresentation. In summary, section 28 of the Act applies where an insured upon entry into the contract fails to comply with the duty of disclosure or makes a misrepresentation, but does not apply where the insurer would have entered into the contract for the same premium and on the same terms and conditions in any event. The section further provides that if the failure in disclosure was fraudulent, or the misrepresentation was fraudulent, the insurer may avoid the contract. Finally, insofar as was relevant to the case, the section provides that if the insurer is not entitled to avoid the contract, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in the position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.
The Court accepted the evidence that the defendant would not have issued any policy, either in 2010 when the initial policy was issued or at the 2013 renewal date, if the plaintiff had disclosed the existence of the project and the prospect he would proceed with it. A similar consequence flowed from the misrepresentation by the plaintiff.
On that basis, the defendant insurer contended that pursuant to section 28(3), the only way it could be placed in the same position it would have been in if the non-disclosure had not occurred or the misrepresentation had not been made, was by reducing its liability under the policy to nil. This was because the policy would never have been issued or renewed. The Court so held.
No decision necessary as to her whether plaintiff suffered loss
As a result, it became unnecessary for the Court to decide whether, had the non-disclosure and misrepresentation defences failed, the plaintiff suffered loss for the purposes of the policy. The defendant had contended that on the balance of probabilities, the plaintiff would have demolished the buildings if the fire had not occurred, so he did not suffer any loss.
This case has exposed a very serious issue confronting purchasers and existing owners of property, which may not be generally known in the community, and probably not even by many lawyers and insurance brokers. It is common for purchasers or existing owners of property, whether domestic or commercial, to have or to form, an intention to demolish their premises for the purpose of re-building or re-development. Often such projects are not tied to any specific time-frame, but are open-ended. Sometimes a very long time-frame is under consideration. The process of selecting an architect, having plans drawn and amended, selecting a builder, perhaps selecting some of the sub-contractors, selecting finishes, (and obtaining permits, where necessary) can drag on for several years, especially if the building is being occupied in the meantime. Typical examples of this would be an owner-occupied home or commercial premises.
Yet the evidence given in this case by the insurance underwriters, and accepted by the Court, was that the insurer would not issue or renew any cover in relation to a building which was the subject of any plan for demolition (or any statutory order for demolition), regardless of the time frame for such demolition.
Moreover, it is common for insurance proposals to enquire as to whether the building is to be demolished. If that question is answered in the positive, it is very likely that insurance cover will be refused, even if the planned demolition is not going to take place until a long time later. Even if the insurance proposal does not enquire about any proposal for demolition, this case supports the argument that the prospective insured would be under a duty to disclose any plan for demolition, as it is material to the risk. Upon making disclosure, it appears that an insurer would be very likely to decline insurance.
This places a purchaser or owner in an invidious position, leaving the building uninsurable, and the owner exposed to a potential huge loss. Additionally, one wonders how financiers would view that situation.
Another matter of concern (and it was not an issue canvassed in the Judgment) is that this case provides yet another example of the sometimes confusing way in which questions in an insurance proposal are framed. In this case the demolition question was as follows:
Is the property undergoing renovations over $75,000, OR, under construction, OR, to be demolished?
There is no doubt that if any one of three alternatives is true, the correct answer to the question must be “Yes”. Obviously, that response would not identify which of the alternatives is true. It would be easy for a prospective insured or a broker to mistakenly view this question as being comprised of three quite separate questions, each of which requires a separate, and possibly different, answer. In the present case, at the time of the initial declaration to the insurer, and at the 2013 renewal date, the property was not undergoing renovations for any amount, nor was it under construction. Thus, if these were separate questions, the answer to those two questions was “No”. However, in relation to what might mistakenly be seen as the “third question”, the Court found that the property was to be demolished, as at each of those dates. Thus, the Court held that the answer to that whole question ought to have been “Yes”. The declaration form sought a simple “Yes” or “No” answer.
Clearly, composite questions in this form have a tendency to be misleading or confusing. This becomes exacerbated by the fact that in “normal” situations where there is no obvious problem in obtaining insurance cover, it is easy for the prospective insured and the broker to treat the lodging of the proposal as a mere formality, which will inevitably result in a policy being issued.
A very interesting question, which does not appear to have been covered by the evidence, is whether the insurer in this case would have refused to grant cover if at the time of the declaration (proposal) the property was undergoing renovations costing more than $70,000, or if the property was under construction. If it would not have refused cover because it did not regard those matters as being as serious a risk as the prospect of demolition, then arguably that exacerbates the unfairness in combining the question about demolition with those other matters involving a lesser risk. It detracts from the seriousness of the demolition question.
The lesson to be learned from all of this is that great care, and time, needs to be taken when completing any proposal for insurance. Filling out a proposal can feel like a very tedious and boring exercise, but if it is done in a hurry and without sufficient care, there is a real danger of misunderstanding or confusion which can result in an incorrect answer. The consequences of this can be disastrous.