The issue arising here is whether the insured-Steve was entitle to rely on the insurance policy he purchased to obtain indemnity after he misrepresented the material facts of the insured house. The focal point is whether Steve have constituted a violation of duty of disclosure and mis-presentation under Australian insurance laws. In Australian, the Insurance Act 1973 and Insurance Contracts Act 1984 are the main legislation relating to the body of law that mandates the insurance industry and insurance contracts, replenished by a series of other pieces of regulations legislated by the states, private code and case law. The duty of utmost good faith is one of the key principles in Australian Insurance Contract Act 19841 and have been established in the case of GIO Insurance Ltd vs Leighton Contactors Pty Ltd, which refers to all parties of an insurance contract should act in good faith, make a full and clear declaration of all relevant material facts in the insurance proposal2.
However, the Australian Insurance Contract Act 1984 provides a significant difference of duty of utmost good faith and duty of disclosure, which are two confusable concepts. The former one is set out in section 13 as a post-contractual obligation, while the latter one is regulated in section 21 as a pre-contractual obligation. Under Australian Insurance Contract Act 1984, Division 1, 2 and 3 of Part IV provides the issue of disclosure, mis-presentation and remedies for non-disclosure and mis-presentation3. The meaning of non-disclosure and mis-presentation are quite similar and sometimes even overlap that non-disclosure of certain fact may also cause a mis-presentation in such pact. Section 21 of the Australian Insurance Contract Act 1984 provides that insureds have been liable to disclose matters relevant to the risk insured. To be more specific, before the insurance contract is entered into, every relevant matters should be disclosed to insurer by insured, including "every 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; every matter that a reasonable person in the circumstances could be expected to know to be such a relevant matter"4. In Permanent Trustee Australia Ltd vs FAI General Insurance Co Ltd (in liq), the High Court of Australia ruled that the facts should be disclosed not only is "relevant to the decision of the insurer as to whether to accept the risk, and if so, on what terms", but also is the insured known to be relevant5.
Mis-presentation is governed by the section 26 of the Australian Insurance Contract Act 1984, which restrains the scope that an insurer are able to establish an actionable mis-presentation by an insured having occurred6. According to section 26(2), a false statement will not be considered as a mis-presentation unless its maker have known, or a reasonable person in the circumstance should know, that the statement would be treated as in relating to the decision of the insurer whether accept the risk7. In other words, an insurer is entitled to exempt from liability under the insurance contract if a mis-presentation of a material matter by the insured is confirmed and result in the formation of the insurance contract whether it is innocent or fraudulent. Moreover, section 23 of the Australian Insurance Contract Act 1984 provides the circumstance of where insured falsely answers an ambiguous question. Section 23 of the Act states that if the insured provides false information to the question, “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 shall be deemed to be the meaning of the question”8.
Backing to Steve’s case, in the property insurance relating to the house, because of different level of risk tolerance, the category of building materials is substantial factor that insurer will