The Facts

Owner of brothel makes claim on insurance policy following fire

On 1 January 2012, there was a fire in a brothel which was run from premises in the Australian Capital Territory. The extent of damage from the fire was such that the brothel had to cease trading.

The brothel was insured under a specialised Adult Industry Insurance Policy which provided cover against property damage, including by fire, and public and product liability.

The insurance was initially issued for the period 3 September 2010 to 3 September 2011 and subsequently renewed for 12 months to 3 September 2012.

After the fire, the company that ran the brothel made a claim under the renewed insurance policy, which was current at the time of the fire.

Insurance company denies liability due to non-disclosure

Under Australian law, prior to entering into the insurance contract an insured has a duty to disclose to the insurer any relevant matter that a reasonable person in the circumstances could be expected to know to be relevant.

The insurer denied liability on the basis that at the time the policy was renewed, the brothel owner had failed to comply with its duty of disclosure.

Case a - The case for the insurer

Case b - The case for the brothel

  • The company that ran the brothel did not disclose that its sole director and manager were both members of a bikie gang. Disclosure of this association was relevant and would have affected our decision to accept the risk of insuring the appellant's premises against property damage and public liability.
  • In our view, an association with an organisation like a bikie gang would have increased the risk of property damage, because such organisations are commonly involved in gang rivalry and acts of retribution, which may result in property damage.
  • We would have associated the bikie gang with illegal activities, which may have increased the risk of an insured event occurring, particularly property damage. For these reasons, we would have declined to renew the insurance policy had the association been disclosed.
  • Furthermore, the company failed to disclose that the brothel's registration under the ACT's Prostitution Act 1992 had lapsed due to a failure to lodge an annual notice. Had the company made this disclosure, we would have declined to renew the policy.
  • The company's failure to comply with its duty of disclosure entitles us to reduce our liability to nil.
  • If we were required to disclose affiliations with bikie gangs or the like, this should have been clearly stated on the insurance proposal form, but it wasn't. We had no idea that the association with a bikie gang was relevant to the insurer's decision to accept the risk of insuring the brothel's premises.
  • An insurer offering an insurance policy specifically targeted at the adult industry should expect that people with criminal connections, including members of bikie gangs, are likely to be involved in the use of the premises.
  • The association with a bikie gang did not create an additional risk that would not have otherwise been present, given that the premises were being used as a brothel.
  • The insurer's own guidelines did not identify an association with a bikie gang as grounds for declining to provide insurance coverage. There was no evidence that the insurer had ever declined coverage on this basis, or even that it had ever made enquiries of other prospective clients about such associations.
  • We were also not aware that the brothel's registration had lapsed. Had we been aware of it, we would have renewed it.

So, which case won?
Cast your judgment below to find out

Vote case A – the case for the insurer
Vote case B – the case for the brothel

Rita Lahoud
Commercial litigation
Stacks Champion

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.