Legge v Universal Hospitality Group Pty Ltd & Ors

Supreme Court of NSW|2020-07-10|Before: Lonergan J

Judgment

On 16 February 2011 Stephen Legge fell down the stairs at the Civic Hotel on the way to a bathroom in the basement level of the building. He sustained spinal injuries causing paraplegia. He commenced proceedings in July 2014 against Universal 1919 and James Kospetas, the occupiers and licensees of the Civic Hotel.
An issue has arisen as to whether public liability insurance taken out by James Kospetas and Universal 1919 ("Universal") should respond to this incident. Whilst the policy contained an exclusion clause for injuries that occur in or arising from a "nightclub", it is common ground that particular exclusion does not apply to Mr Legge's claim as he had been drinking in the public bar before using the stairs to access the bathrooms.
A different basis for refusal to indemnify has been argued. The insurer, formerly Marketform Underwriting Agency Ltd now known as Neon Underwriting Limited ("Neon"), denied indemnity on the basis that there were failures to disclose and/or misrepresentations of relevant matters on the renewal form for the relevant insurance period, and that had those disclosures been made, the insurer would have declined to renew the policy.
On 20 June 2019 I published Legge v Universal Hospitality Group Pty Limited [2019] NSWSC 760 in which I decided that three questions relating to that insurance are to be determined separately from any other questions in the proceedings and before the trial of the other questions in the proceedings.
Those questions are: 1. Whether Universal breached its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) ("the ICA") by reason of the matters pleaded in paragraph 3 of Neon's Defence to the Amended Second Cross-Claim. 2. Whether Universal made a misrepresentation within the meaning of s 28 of the ICA by reason of the matters pleaded in paragraph 3 of Neon's Defence to the Amended Second Cross-Claim. 3. Whether Neon is entitled, pursuant to s 28 of the ICA, to: 1. Avoid the policy; or 2. Reduce its liability under the policy and, if so, to what extent.

Facts

The Civic Hotel comprised three story premises at 388 Pitt Street, Sydney. It was at all the relevant times a Hotel licensed under the Liquor Act 2007 (NSW). During 2010 and 2011 the Hotel had a mixed use, with the top floor comprising a restaurant and bar and the ground floor used as a public bar and gaming area. The evidence indicated that the basement level had various uses that were the subject of competing evidence, cross-examination and submission as to what those uses in fact were or ought to have been called.
In his affidavit sworn 10 December 2019, James Kospetas described the basement level as a function room with a bar that was used to provide entertainment for patrons at set times and as a separate function room for hire. He stated that the function room was known as the Civic Underground and before that was known as the Civic Theatre. He stated that: "Originally the function room was a venue for cabaret shows, live bands and private functions. In 2008 the function room underwent a refurbishment. The refurbishment involved the installation of a row of white booths, a sunken dance floor and console for a disc jockey. The function room could now host cabaret shows live bands or a DJ and had a dedicated dance floor."
On the night Mr Legge fell, a jazz band was playing in the underground part of the Civic Hotel which did not according to Mr Kospetas attract much of a crowd.
On 1 April 2010 the Civic Hotel's insurance broker, Finn Foster APB Pty Ltd, submitted a completed proposal form for "Hotel Resort/Restaurant Public & Products Liability Insurance".
A Certificate of Currency was issued on 17 June 2010 confirming that cover had been issued to the Civic Hotel for the period 17 February 2010 to 31 January 2011 with the insurer noted to be "Lloyds of London" and signed for and on behalf of ASR. No claims were notified during that period of cover.
On 16 November 2010 an insurance renewal questionnaire was forwarded by a staff member at ASR to Finn Foster. That document was headed "Insurance Renewal Questionnaire Hotel/Motel/Resort/Restaurant".
The questionnaire was completed based on information provided by James Kospetas. A copy of the completed questionnaire is extracted below:
A series of questions commencing with the words "Do you have" were arranged with a series of yes/no boxes and boxes for further information to be provided. Those questions addressed the following items: "childminding facilities", "dance floor", "dancing", "live entertainment", "discos", "a cover charge", and "Nightclub".
The only one of these items that was the subject of any clarification by way of definition was "nightclub" where the following direction appears after the word Nightclub: "Per definition on page 10 section 14.2 of the ASR Hotel/Motel/Backpacker Liability Wording".
It is common ground that there is no definition of "Nightclub" on page 10 of the policy but there is reference to "Nightclub" on page 13, a page which is headed "Information applicable to Coverage Sections A, B, C under which a heading appears "Definitions applicable to Coverage Sections A, B and C":
Somewhat confusingly, and relevantly to the dispute here, 14.2 is followed by 14.3 "Hotel and Motel" and the following wording:
James Kospetas completed this form with Universal's solicitor. In his affidavit sworn 9 March 2020, which it appears was prepared in response to the affidavit of Mr David Lawson from ASR, he further explained relevant aspects of the operation of the premises and the effect that those matters had on the way in which he answered the questionnaire.
Mr Kospetas made the point that the hotel offered a variety of services over its three levels and that the hotel traded seven days a week, and at that time had approved hours of operation from 9:00am to 5:00am every day of the week although it did not always trade to 5:00am.
He confirmed that the hotel had numerous spaces over the three levels available to be hired for private functions or events throughout the week. He stated that the way in which the function room and first level worked was that they were often hired out on a Friday and Saturday night by promoters for events involving DJs although occasionally the spaces were hired or used by Universal for other activities from time to time. Promoters would bring the DJs and some would collect a cover charge from the patrons attending, the promoters were responsible for providing a host and collecting the cover charge fees.
The arrangement was that there was a guaranteed bar spend when promoters hired any space and sometimes Universal also charged a room hire charge. Universal took the sales from the bar and arranged for the bar staff and security guards.
The primary use of the first level was as a bar and a formal hatted restaurant run by Peter Conistis and initially called Civic Dining. At some point in the relevant period, the restaurant structure changed, and Mr Conistis ran Eleni's Bistro on the ground floor.
Mr Kospetas made the following specific points in his affidavit about the questionnaire completion: "7. The insurance was for the whole of the premises that is the whole of the hotel and I answered the questions with this fact in mind. 8. In relation to the renewal form, I ticked "no" to the question as to whether Universal 1919 had "childminding facilities" because the hotel did not have any such facilities. 9. As to the next question "Do you have Dance Floor'' I ticked "yes" because there was a dance floor in the function room. 10. Given the number of activities that occurred at different times and in different parts of the hotel organised by Universal 1919 and different venue hirers, it was not completely clear to me how to best answer all of the questions given the limited number of boxes to tick. 11. I considered the description of entertainment involving a "DJ" coupled with my other answers to be an adequate description of the overall activities of the hotel. Nobody asked me anything further about the disclosed "DJ" activities, live entertainment, dance floor or any other matter. I would have answered any further enquiries from the broker or underwriter. 12. In answer to the question asking "do you have ... dancing", I ticked "occasionally". I ticked that dancing occurred "occasionally" because the hotel was a multi-function venue which had bars and restaurants and spaces for hiring. Some of the activities were carried out by Universal and some by the venue hirers. The main consistent use for the hotel over the years has always been as a bar, restaurant and gaming venue though some patrons dance some of the time, in particular on some of the nights when a space within the hotel was hired by a promoter. 13. The hiring of the various spaces at the hotel for the events and private functions was not exclusive to anyone for a long term. There were no long-term arrangements with any promoter or any-one else. 14. Often events did not involve dancing. The bars, restaurants and gaming areas did not, in the normal course, involve dancing. An event for ANZAC day would not involve dancing however a wedding reception may. Universal occasionally conducted its own events and hired bands, singers and other cabaret style performers to perform at the hotel. Sometimes Universal would put on a show and dinner package at the hotel. This sometimes was held on the first level and sometimes in the function room. The following have performed at the hotel: Marcia Hines, Gail Page, Rhonda Burchmore, Grace Knight, Trevor Ashley, Demi Hines, Darryl Beaton, Courtney Act, Judi Connelli, Simon Burke, Tom Burlinson and Tim Draxl. From time to time there have been singers from Greece who performed at the hotel. 15. Other events that Universal would conduct over the years included trivia nights. 16. Apart from a few events in 2008 and prior, where events were organised in house by Universal, under the name of Civic Saturdays and Civic Social Club where DJs were hired by Universal, Universal did not organise DJ events with cover charges as part of its business. The DJ events for Civic Saturday and Civic Social Club were only for short periods of time. 17. The DJ events at the hotel were usually conducted by the promoters who hired the function spaces of the hotel. 18. Universal did hire a DJ to play music on the ground level more often than not on a Friday night. This would usually be background music though occasionally a few patrons may start dancing even though there is no dance floor. Sometimes a DJ would be hired to play on the ground floor by Universal on a Saturday night. Again, occasionally some patrons might dance. …. 31. In answer to the question asking "Do you have ... live entertainment", I did not consider a DJ to be live entertainment so I ticked "occasionally". In my mind "occasionally" was the correct answer because Universal did provide live entertainment at the hotel from time to time. 32. I ticked "no" to the question "do you have ... discos". I ticked "no" because Universal did not arrange discos at the hotel. If a DJ, arranged by a promoter who hired a function space played disco music at a particular function that is not something that was within my expectation or could be known by me at the time of completing the renewal form. The hirers of the function spaces were not required to submit their play lists to Universal and Universal did not in any way control any such DJ. The bookings for the function spaces were ad hoc . The Civic Hotel was not a disco, nor did it arrange discos. 33. I ticked "no" to the question "do you have ... A cover charge", because at the relevant time Universal 1919 did not charge a fee for entry to the hotel. Any cover charges for events at that time were collected by the promoters who hired the function room. 34. I ticked "no" to the question "Do you have ... Nightclub", because the Civic Hotel was not a nightclub. It was a licensed Hotel. It had a function room on the basement level which was sometimes hired by promotors to organise DJ nights at which music was played. I disclosed the fact that the hotel had DJs when describing the type of entertainment. 35. I note Exclusion 7.6 of the Policy in place (and being renewed), which is exhibited to my first affidavit at tab 11 of JK-1, did not cover: "Loss, damage, liability or expense arising directly or indirectly out of nightclubs." 36. I also note at definition 14.2, the word "Nightclub" was expressed as follows. 37. The Civic Hotel was not a premises which was licensed as a nightclub. It was licensed as a Hotel. 38. The hotel was not arranged in a manner as to offer permanent dancing and musical entertainment. It was a multi-use premises. There was a general bar and gaming room on the ground level. There was a bar and usually a restaurant on the first level. If an event was to occur on a Friday or Saturday night on the first floor, the furniture had to be rearranged. The function room was not arranged to offer permanent dancing and musical entertainment. It was arranged in a manner to conduct various functions. For example, the seating booths along the perimeter, which occupied more room that the sunken floor area, were there so that patrons could enjoy sit-down events, such as a cabaret show. The sunken floor area in the basement level had seating booths partly around its perimeter. The sunken floor area was from time to time arranged with tables and chairs for some events the hotel conducted, for example for a cabaret show. The seating booths were removed from the sunken floor area during renovations carried out in the basement level in 2013. 39. The various parts of the premises have different lighting, sound systems and soundproofing and access to natural light. During the relevant period Universal did not charge a cover charge, although as stated above some promoters would sometimes charge a cover charge to that part of the premises hired by them."
The tenor and approach of the cross-examination of Mr Kospetas by senior counsel for Neon seemed to proceed on the basis that Mr Kospetas was aware, or should have been aware, that Neon would not insure the Hotel if it stated that it had some area or room that on one or some nights a week corresponded to its rather idiosyncratic definition of "Nightclub". This was an unreasonable and unrealistic position to take, particularly as the terms of the policy made it clear that the underwriter could choose to cover those activities if requested and special arrangements were made for premises like the Civic Hotel, or take the default position, which was to exclude them. Much was also made of correspondence and development applications to council authored by others, which referred to the basement area as a "nightclub". This was not Mr Kospetas's term, and there is no suggestion that he adopted that term in that context, maintaining that the basement area's diverse use, including jazz and cabaret format and events and other functions. In any event use of the word "nightclub" by others, and even by Mr Kospetas, as a short form description of some of the features and/or activities that occurred in the basement does little to inform the real questions. For that reason, Mr Ashraf the security guard's description of what he recalled was the type of activities in the basement on some Friday and Saturday nights he observed, was of little assistance on the real issues.
Mr Kospetas was on occasion non-plussed in cross-examination by the focus on the nomenclature of the space. Mr Kospetas's focus was understandably on the multiple uses of the whole premises, which is, after all, what was to be insured at the relevant time. He presented as an honest businessman who did his best to describe the premises and activity at the Civic Hotel that occurred based on his understanding of the range and spread of functions in the three storey multi-use hotel. Any challenge to his genuineness or credibility in this regard, or in any regard, failed.
The position is well reflected in this exchange towards to end of the cross-examination: Q. In circumstances where the position was, as you have just described in your evidence in relation to the employment of security personnel, special lighting, the existence of a sound system, you would accept, wouldn't you, that if you had considered these matters carefully when you completed the proposal for in 2011, you would have recognised that the premises satisfied the nightclub definition, correct? A. No, it's a hotel. Q. I want to suggest to you that, in fact, you did appreciate when you completed the questionnaire that those elements of the definition were satisfied. Do you accept that? A. Sorry, repeat that again. Q. I want to suggest to you that you did, in fact, appreciate when you completed the renewal questionnaire that those elements of the definition of "nightclub" had been satisfied? A. I'm a little bit confused now. Q. I don't want you to be confused. A. Yes, so please explain that a bit better. Q. You signed this questionnaire form? A. Yes. Q. In January 2011? A. Yes. [1] …. Q. When you signed the insurance renewal questionnaire in 2011 you knew, in fact, that Universal 1919 employed bouncers or security personnel to manage all areas of the premises; correct? A. Yes. Q. You knew that it had special lighting; correct? A. It had lighting, yes. Q. You knew that it had a permanent sound system; correct? A. Throughout the whole building, yes. Q. You knew that by reason of those matters the premises satisfied the definition of "nightclub" in the policy? A. No. I don't agree with that. Q. I want to suggest to you that the answer you've just given me is not true. Do you accept that? A. No. Q. It was an answer that you've given in the hope of avoiding the consequences of an avoidance of the policy? A. No. [2]
Against the background of a hotel manager who also ran premises - the Vault - which was in fact licensed as a nightclub and the subject also of insurance referral by Finn Foster, there was this exchange: Q. If you just leave it to one side we will fix it up later. Just put it that to one side. In January 2011 you understood a nightclub to be a premises or a venue; is that right, as a general matter, a general proposition? A nightclub was a place. A. It's a licence. Q. People would talk about going to a nightclub? A. A liquor licence. Q. People would talk about going to nightclubs, to your understanding? A. People go to my hotel. I, I know the difference of nightclub and hotel. Q. People would talk about going to a nightclub; correct? You understood that idea, going to a place. A. Could you please repeat? Are you saying I know it or is it some people? Q. In 2011-- A. Yes. Q. -- you understood that a nightclub was a location, a venue? A. Yes. Q. People would talk about going to a nightclub and you understood that to mean going to a venue or a location; correct? A. No. Can I say my interpretation? [3]
Ms Usher at Finn Foster forwarded the completed questionnaire to Ms Dux at ASR on 25 January 2011.
On 27 November 2011 Mr Lawson, a liability underwriter at ASR, forwarded the questionnaire to Carly Cappuccio of Windsor Partners, the relevant Lloyds syndicate broker, accompanied by this email: "Hi Carly, Limit of Liability - $20,000,000 Excess - $5,000 Occupation - Licensed Hotel Wording - ASR Hotel Situation - Inner City Sydney Can you please refer to underwriters. Turnover has increased by 60%. Note broker is Finn Foster, largest supporting…… This policy was incepted last year and a Flat Rate applied of 0.110% to the Turnover. In summary:- * 10/11 Turnover $2,036,000 * Premium $2,239.60++ * 11/12 Estimated Turnover $5,000,000 * Suggest based on same rate of 0.110, $5,500++ Nil claims. Please find attached Liability Renewal Questionnaire. Please let me know whether you require any additional information. Regards, David Lawson, Liability Underwriter"
In his affidavit executed on 12 February 2020, Mr Lawson stated that he "would have" read the questionnaire and reached certain conclusions about the Hotel based on the information. He included in his affidavit a number of assumptions he says he "would have" made which were surprising given his assertion that the questions were of "upmost (sic) importance" when considering a renewal. He stated that because the dance floor size was not stated in the questionnaire, that answer, together with answers to the other questions indicated to him that "any dance floor at the hotel must be very small". He also decided that the handwritten reference to "DJ and cabaret" in the box requesting the description of live entertainment "indicated to me that the hotel had occasional ambient entertainment through a DJ or artist such as a singer/guitarist in a corner of the hotel".
Mr Lawson also stated in his affidavit that he referred the risk to Neon before issuing a quote because the turnover had increased by over 50%. This was incorrect. The turnover had not changed and the claims matrix required referral to London if the turnover increased over 20%. There is no evidence from Ms Cappuccio or anyone else from Neon as to why the referral was made to it and what, if anything occurred by way of processes and or decision-making at Neon's end. The email by Mr Lawson requests referral to underwriters.
A response was provided the next day from Ms Cappuccio confirming the "underwriters had agreed to ASR's proposed renewal terms" subject to a $10,000 assault and battery excess.
Mr Lawson stated in his affidavit that it was only at this stage that he provided this material and the underwriting file to Mr Sommer for approval. Mr Sommer signed the Hotel Renewal Summary and the renewal template in his role as "Senior Liability and Property Underwriter". Mr Sommer prepared his evidence and gave answers in cross-examination based on his recollection of what he asserted were fixed practices at the time. Documentation allegedly in support of such practices was scant and inconclusive, and the procedure Mr Sommer said he would have followed, was not what occurred here.
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.
I have significant doubts about the reliability of the evidence of both Mr Sommer and Mr Lawson and will return to that subject when dealing with the underwriting evidence and role of ASR.
On 28 January 2011 Mr Lawson emailed Ms Usher at Finn Foster and provided a quotation for renewal terms for the Civic Hotel and attached amongst other items, a copy of the policy wording. The Policy cover was expressed to be "Broadform public and products liability" and the "occupation" of the insured was described as "licensed Hotel Including Property Occupiers Liability". Under the Heading 'Major Exclusions", amongst a number of items appears "Nightclubs and or Nightclub Activities as described below":
On 31 January 2011, Ms Usher requested renewal. Cover was confirmed by Mr Lawson by email later that day, noted to be effective from that date.
Whilst correspondence requesting and refusing indemnity is not within the material tendered, it is evident indemnity was sought and refused leading to Universal filing its Cross-Claim against Neon.

Insurance Contracts Act 1984 - disclosures and misrepresentations by an insured and remedies for nondisclosure and misrepresentations

The ICA states its objects clearly as: "An act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provision included in such contracts, and the practices of insurers in relation to such contracts, operate fairly and for related purposes".
Part IV of the ICA deals with disclosures and misrepresentations. Division 1 deals with an insured's duty of disclosure: 21 The insured's duty of disclosure (1) Subject to this Act, 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: (a) 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 (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind. (2) The duty of disclosure does not require the disclosure of a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer. (3) Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.
Section 22 requires the insurer to inform the insured of its duty of disclosure. There is no issue in these proceedings about that. Neon claims that it informed Universal of its duty of disclosure but in completing the questionnaire, Universal breached its duty of disclosure and misrepresented the Premises by not disclosing that it had a "nightclub", "discos", access to parts of the premises limited by payment of a "cover charge" and that there was "frequent" dancing and live entertainment.
Universal denies that the way it completed the questionnaire breached its duty of disclosure and submitted that there must be focus on what s 21 actually requires of an insured. It also calls to its aid the clarifying provisions of Division 2 of Part IV of the ICA dealing with "Misrepresentations by Insured".
First, Universal submitted that s 21(1) requires both subjective examination of what the insured knew, and an objective examination about what the reasonable person in the circumstances of the insured would ordinarily be expected to know. As the policy clearly excluded liability arising from the activities of a nightclub on the premises, and anything arising from those activities, there was no need to disclose it as it would be irrelevant to risk and the decision to underwrite, given the policy makes it clear that unless special arrangement is made for cover of that type of "venue" within the premises, any liability arising from a "nightclub", as per the definition set out in [18] above, is excluded.
There was an incomplete answer regarding the dance floor, and no follow up inquiry, so any duty of disclosure in relation to that matter is waived by operation of s 21(3).
Sections 23 and 24 provided as follows: 23 Ambiguous questions Where: (a) a statement is made in answer to a question asked in relation to a proposed contract of insurance or the provision of insurance cover in respect of a person who is seeking to become a member of a superannuation, retirement or other group life scheme; and (b) 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, in relation to the person who made the statement, be deemed to be the meaning of the question. 24 Warranties of existing facts to be representations A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into.
Even if anything stated in the questionnaire could validly said to be untrue, the provisions of s 26 apply: 26 Certain statements not misrepresentations (1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation. (2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. (3) ….
Clearly the insurer has some role in ensuring the answers are complete and cannot passively guess or blame the insured if the insurer fails to seek clarification: 27 Failure to answer questions A person shall not be taken to have made a misrepresentation by reason only that the person failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.
Section 28 of the ICA provides for remedies for non-disclosure and misrepresentations: 28 General insurance (1) This section applies if a relevant failure occurs in relation to a contract of general insurance, but does not apply if the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the failure had not occurred. (2) If the relevant failure was fraudulent, the insurer may avoid the contract. (3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the relevant failure had not occurred.
Neon did not assert that the failures were fraudulent and so s 28(2) is not relevant. Neon bears the onus to persuade the Court that if the relevant matters were disclosed, it would not have offered insurance at all and alternatively that the asserted misinformation and alleged absent disclosures entitle it to avoid the policy. Based on the following analyses, even if I formed the view that Universal had breached its duty of disclosure, which I have not, I was not persuaded that Neon has met its onus in either respect under s 28.

What were the underwriting policies and practices of Neon and their Australian agents ASR?

(i) Documentation

The following matters were the subject of agreement in the statement of agreed facts tendered as Exhibit A:

Neon is a Lloyds managing agent domiciled in the United Kingdom with permission to manage a syndicated Lloyd's syndicate 2468 and carry on underwriting and other functions as a member of the specialty Lloyds market.
Neon was the underwriter of the policy which was effected through its Australian cover holder ASR Underwriting Agencies Pty Ltd.
The applicable cover holder agreement in place between ASR and Neon was agreement number WNR/BGH/10/0026 dated 18 May 2010 for the period 1 June 2010 to 1 June 2011 and the Binding Authority Endorsement effective 1 June 2010.
Universal 1919 was the named insured under the policy.
Finn Foster was Universal 1919's broker.
Mr Legge's claim falls within the period of cover.
The applicable policy wording was the ASR Underwriting Hotels/Motels/ Back-packers/Resorts version Jan 09 and the schedule to the policy was the Lloyds certificate insurance schedule number 20048501C dated 11 February 2011.

The Schedule to the Agreement between ASR and Neon was tendered (Exhibit C). The ASR Binding Authority for Hotels 2009 period included a page of information headed "Hotels (not licensed as a nightclub)". This is followed by a series of proposed base rate calculations reflecting bar and other considerations, including the State in which the hotel is located. Limits of indemnity are referred to, with the top limit being $20 million (which is the cover that was provided to the Civic Hotel). Under the heading "Declinatures" appear the following items:

Any risk that does not have satisfactory answers to questions raised on the proposal form;
Any venue without smoke detectors unless installed within 30 days;
Nightclubs/on-site disco;
Rock bands defined as metal music;
Hotels that allow formalised hen/bucks parties;
No bar attendance program in place unless insured agreed to implement within eight weeks of inception;
No logbook of incidents maintained unless insured agree to implement within one week of inception;
ASR to run diary system;
Victoria where Freemans are being approached.

Under the heading "Referral to insurers before binding" the following items are listed:

Any risk not falling within above parameters;
Any venue with a dance floor exceeding 20m²;
Any venue providing live entertainment where dancefloor exceed 20m²;
Sports bars theme bars Irish pubs;
New South Wales where population over 50,000 people;
Hotels with playgrounds unless playground requirements applied;
Hotel with strippers/topless bar staff;
Total turnover greater than 2.5 million not including bottle shop turnover;
Revoked license;
Claims $5,000 any one loss or $15,000 in all in the last five years;
Premium above $25,000;
Where sporting activities are provided by the hotel other than swimming or gymnasiums, business located outside the parameters set above;
Hotel has their own security (specific) or employs security contractors;
Bottle shop turnover excess $1.5 million.

There was also within that Schedule document a page headed "ASR Renewal Matrix" noted as "applicable to previously referred business only" and "for existing Marketform Accounts". It lists a set of circumstances where, implicitly, there is no need for ASR to first obtain Marketform's agreement to the terms and conditions for such insurances prior to any terms being indicated or bound. It provides: "Where the items above are not complied with, the coverholder must first obtain Marketform agreement to the terms and conditions for such insurance prior to any terms being indicated or bound".
Also comprising Exhibit C is the "Australian Binding Authority Endorsement" which is annotated "for use in conjunction with Binding Authority Wordings" by which the cover holder agrees to comply with various matter including things such as license requirements, compliance with codes of practice, privacy, and taxes.
The Binding Authority Endorsement, dated as effective 23 June 2009, is signed by John Flower as Managing Director of ASR.

(ii) Mr Lawson's Evidence

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 first was the error that he made regarding the reason why Universal's renewal was referred to Neon given ASR professed (through Mr Sommer's evidence) to have exercised all the necessary authority to bind cover and Mr Lawson's affidavit made no reference to the referral to the Lloyds Underwriters (Neon - Ms Cappuccio): Q. Well I'll try again. Or I'll try something a little different. The practise or process in relation to renewals had as a significant and important component to it the going through of all the requirements in the renewal matrix at 532, didn't it? A. Correct. Q. And did you do that, or don't you know whether you did that? A. I've demonstrated that in my referral to Lloyd's. That's in my affidavit. Q. You'll see that the renewal process so far as increase of turnover refers to no need to refer if the premium has not increased by more than 20% of the estimate provided for the previous period? A. I think you'll have to ask that question again. I think you've got that, I think you got the word premium mixed up with-- Q. I may have, I'm sorry about that. A. --the turnover. Q. Let me just try again. Halfway down the page you'll see that - well, if we start at the top: "Marketform authorise binding of the existing renewals subject to the insured's estimate of their turnover for the forthcoming period of insurance provided for rating purposes and declared in the renewal application form has not increased by more than 20% of the estimate provided for its previous period of insurance." Do you see that? A. So you're referring to the, the matrix, the renewal matrix, are you? Q. Yes, I was reading at about point 4 on that page. A. Right. So I'm still on, I'm still on page 452, sorry. Q. I'm sorry if I've confused you. Could you go back to 532? A. Okay, I've got it open now. Q. So this sets out the authority that ASR had to bind existing Marketform renewals without first obtaining Marketform's agreement, correct? A. That's correct, yep. Q. And one of those criteria was whether the insured's estimate of their turnover for the forthcoming period provided for rating purposes and declared in the renewal application form has not increased by more than 20% of the estimate provided for its previous period of insurance? A. Yep, I've got it, I read it. Yeah, I can see that, yep. Q. Okay. Do you claim that you, according to your usual practise, followed this matrix at the time you were deciding whether or not to refer to ASR? A. Refer to Lloyd's? Q. Yes, my apologies. A. Look, clearly, clearly that's, that's, that was the basis of my referral to Lloyd's, was the increased turnover. Q. Yes, but what I'm asking you is this. Do you say that it was part and parcel of your process to tick off all the things in the ASR renewal matrix to come to a decision about whether or not you needed to refer the business to London? A. Very, very much part of my process and practise. Q. It's a part of your process that you do not mention in your affidavit, isn't it? A. But can demonstrate by my referral to Lloyd's in relation to one of the points. Q. But you do not refer to this process or practise in your affidavits, do you? A. No. [4]
Mr Lawson was then taken to renewal terms and the wording of the Policy which stated that underwriters were permitted to cover a Hotel that included a nightclub or nightclub activity - 14.2 and 14.3. It was put to Mr Lawson that these provisions contradicted the assertions he made that cover could not be granted to a hotel that was "mixed use": Q. You'll see - and take as long as you like to read this provision - and I'm starting from the words, "Any insured hotel or motel may from time to time provided live entertainment and/or dancing." Do you see that component? A. I see that, yep. Q. Then you see the words, "However, if this activity is undertaken," and then there's five points. Do you see that? A. Yep. Q. Then it says, "Then such activities are specifically excluded under this policy." Do you see those words? A. I see those words, yep. Q. Then it goes on to say, "Underwriters may agree not to exclude such activities listed above provided full details are submitted to them and an additional premium, if any, is paid to cover these activities." Do you see that? A. I see that, your Honour, yep. Q. It's quite apparent, isn't it, that the underwriters who are responsible for this policy are indicating to insureds that they may agree not to exclude such activities listed above, provided full details are submitted and an additional premium is paid to cover the activities? A. I don't - I don't necessarily agree with that. Q. But it's there in black and white, I suggest, isn't it? A. Look, in 11 years of underwriting, no-one has come to me and asked me to ‑ and disclosed nightclub activities referring to that section of the - of the wording. Q. Whether they've referred to that section of the reading or not, it is apparent to you, isn't it, that a fair reading of that indicates that underwriters may agree to cover the items that fall within descriptions 1 to 5 if full details are submitted? A. I'm more interested as to what my authority is to, to write under the matrix. Q. Just answer my question, please. A. Can you repeat the question again, please? Q. It's quite apparent, isn't it, that underwriters are indicating in their very policy document that they may agree not to exclude the activities in items 1 to 5. That's right, isn't it? A. They may agree. Q. Of course, they can't agree unless they're asked, can they? A. I, I agree with that. Q. Can we go, please, to a document that is at page 666. This is your email to the broker dated 28 January 2011; correct?

A. That's correct. Q. It attaches your liability renewal terms? A. It does, yep. Q. That's Mr Sommer's signature, is it, on page 667? A. That's, that's correct. Q. You'll see that there's a heading on page 668, Major Exclusions? A. Correct, yep. Q. You'll see that the first of those is a playground exclusion; the second is a participant's exclusion; over the page, the third is a deliberate acts exclusion; and the fourth is a nightclubs and/or nightclub activities as described below. Do you see that? A. Yep. Q. Have you looked at this document recently? A. Not recently, no. Q. You see that it starts off by saying, "A licensed hotel or motel, licensed as such by the appropriate state licensing laws," et cetera. Do you see that? A. Yes, I see that. Q. Then it goes on to say, "And any insured hotel or motel may, from time to time, provide live entertainment and/or dancing"? A. Yes, I see that. Q. Then it has a proviso, "However, if this activity is undertaken," and then there's an items 1 to 5 and then 6 says, "Then such activities are specifically excluded under this policy." Take as long as you need to read it. A. Yep, sorry, can you say - are we going to the points underneath? Q. I just want to give you a chance to read it first, I want you to read from the words "Any insured hotel" down to the end of item 6, can you do that please? Tell me when you're finished. A. Yep. Okay, I've completed that, yeah. Q. Okay. You understand that the document that you're sending to the insured is identifying first that a hotel or motel may from time to time provide live entertainment and/dancing, do you agree? A. Agree. Q. Secondly, that if that activity is undertaken, and then in any of the circumstances in 1 to 5, then such activities are specifically excluded under the policy in item 6? A. Can you just ask that-- Q. Yes, yes. A. Yep. Q. You see that the renewal terms say that: "If the activity, that is live entertainment and/or dancing, is undertaken, one, away from the insured's premises; two, via a separate entrance available to the general public outside of the internal boundaries of the insured's premises; or three, as a nightclub or is marketed as such or is signed or termed as a nightclub; or four, and operates within the normal licensing hours operated by the hotel or motel; or with a separate entrance fee charged to the general public for such activities and it is available without entering the insured's main premises, then such activities are specifically excluded under this policy." Do you see that? A. Yep, I see that. Q. Then you see underneath that, "Underwriters may agree not to exclude such activities listed above, provided full details are submitted to them and an additional premium, if any, is paid to cover these activities." Do you see that? A. Yep, I see that, yep. Q. You, in writing this document, and sending it to the insured are representing to the insured that underwriters may agree not to exclude the items in 1 to 5, aren't you? A. The words "may agree" stand out. Q. The answer to my question is yes, isn't it? Should I put it to you again? A. No, no, like I answered your previous question, in relation to the exclusion in the wording, I think what you're referring to is nearly exactly the same wording. My answer was "may agree". Q. But it is clear that you are indicating, on behalf of ASR that underwriters may agree not to exclude such activities listed above, that's what you're saying, isn't it? A. Yeah, they may, they may agree. Q. Yes and of course you don't know whether or not they'll agree unless you ask them, do you? A. Yeah, you ask them, yeah. Q. So you sent this document, but it was authorized to be sent by Mr Nathan Sommer, wasn't it? A. That's correct, yep. Q. You'll see him signing it on page 669, but then putting a handwritten signature probably against the initials or the amendments that are on page 667, would you agree? A. Agree, yep. [5]

Mr Lawson agreed that renewals that were outside the matrix range had to be referred to London, based on what the Underwriting Matrix specified: Q. What you put in your affidavit was the true position in that respect, I suggest. If the risk described in an application for insurance goes outside the matrix range the underwriter at ASR is required to refer the risk to the syndicate for special consideration. That was the requirement that you swore to, wasn't it? A. That's what is in the - that, that is correct. That's what's in that paragraph. [6] And further: Q. Can we go over and see what follows that, please? Can we just look at the structure of this to start with? Perhaps you'll need to go back to the previous page again. There's a heading, "Declinatures" and then there's various items referred to under that? A. Yep. Q. Then there's another heading, "Referral to insurers before binding," do you see that?

A. Yep, got you, yep. Q. Whilst you have various items under the heading, "Declinatures," the very first item under, "Referral to insurers before binding" is, "Any risk not falling within above parameters." Do you see that? A. Yep, I've got that, yep. Q. And you read that as a reference to the declinatures such as nightclubs or onsite disco, is that right? A. I, I, I, I see, I see - I, I fundamentally see the word "declinature." Q. Yes but I'm drawing your attention to the words after "referral to insurers before binding, in particular, any risk not falling within above parameters." You would include within that the nightclubs or onsite discos as you understand it, wouldn't you? A. Correct, yep. [7]

Mr Lawson was then asked some questions about a Notice to Produce or Subpoena requesting underwriting files that had been served on ASR. Mr Lawson volunteered the following: Q. As you understand it, Mr Flower, perhaps with some assistance, actively sought to locate material from 2010 and 2011 that supported the practices and procedures that you have identified in your affidavit, is that right? A. I, I believe so, yep. Q. As you understand it, we was unable to locate any material to support what you were going to say about those practices and procedures in your affidavit, is that right? A. I don't know, I, I don't know the answer to that, I, I-- Q. Certainly none was shown to you? A. Sorry, there, there was - there was a summary shown to me - a, a summary shown to me of, of information, as, as a result of those searches. Q. Right and-- A. As, as - Q. --is this the case, that the summary of the information in those searches provided no helpful information that supported the account that you were giving of the practices and procedures in your affidavit? A. Look, look, from, from memory, the search and - this is from memory, the search identified 16,000 items of information and that summary consisted of, of maybe half a dozen. Q. Is this the case, that after searches having been undertaken, about a dozen matters that were perceived to be relevant were located, is that the case? A. That's fair to say, yep. Q. Is it the case that none of those materials were provided to you to support what you had said in your affidavit? A. I did not answer those, yeah, I did not answer the, the - I did not summarise or answer those half a dozen, sorry, those dozen items. Q. Is this the case, that there's a dozen items that were located that were relevant to the practises and procedures adopted by underwriters at ASR in or about 2011 dealing with the types of issues we're dealing with in this case? A. That's fair to say, yep. Q. Did you have any discussions with anybody at ASR as to whether or not you could look at that material? A. Look, I was given, I was given that spreadsheet. Q. Right. A. But I didn't, I did not respond to those, that spreadsheet. Q. Is this the case, that there was nothing in that spreadsheet that you thought worthy of including in your affidavit as support for the practises and procedures you claim existed? A. Look, look, my, my times, my timeframe might be a bit blurry here, but I, I believe I'd, I believe my witness statement was complete and I saw those after. Q. And you've sworn a supplementary affidavit since, haven't you? A. Correct, yep. [8]
Mr Lawson reported to Mr Nathan Sommer who in turn reported to Mr John Flower: Q. Mr Flower is still in overall charge of the operation of ASR, isn't he? A. He is. [9] And further: Q. The person in overall charge of the organisation was Mr Flower? A. Yes, that's correct. Q. He was a person who had the relationship, so far as ASR is concerned, with the underwriters in London? A. Yeah, he, he was - he's key to that relationship, yep. Q. In matters of a controversial nature, as to whether or not cover should be bound, he would often become involved in those issues, wouldn't he? A. Yeah, I, I think that's reasonable to say, yep. [10] And further: Q. In 2011 did he, did Mr Flower and Mr Sommer manage the cover holder binders, or was it just Mr Flower? A. I would think, I would think Nath, Nathan had some input into that, but predominantly John Flower. There was also another, there was also another senior property underwriter at that time, Phillip Neilson, who's on this list, who was, who was, who would have assisted. Q. Did Mr Flower in 2010 and 2011 have day to day management and supervision of underwriting staff? A. Yeah, I, I believe that's, yes. [11]
Mr Lawson was asked about the contents of his email to Ms Cappuccio, and the reference he made in it to "broker is Finn Foster…": Q. Do you recognise that as your email to Ms Cappuccio of 27 January 2011? A. Yep, that's my-- Q. In this email you neither recommend the taking on of the risk, nor the rejection of the risk, do you? A. No and - I don't, no. Q. But what you do say is, "Note broker is Finn Foster, largest supporting....." Do you see that?

A. I do see that, yep, yep. Q. And you put that in the email because you wanted the London underwriters to know that the business had come from an important source for ASR, didn't you? A. That's the - that, that would have been the intention, yep. [12]

It is evident from the following exchange, the asserted "usual practice" simply was not followed: Q. In any circumstance where a renewal was not going to be made for the client of one of the biggest referring brokers, that's the sort of matter that Mr Flower would ordinarily become involved in, isn't it? A. I, yeah, you would have to ask - it's not ordinary, what I, at that time, I would not have ordinarily referred it to him. I would have gone to Nathan first, and I, I do, I acknowledge that, that Nathan would, would then take that to John. Q. That would be your expectation based upon your experience at the time, would it? A. Yep. That's correct, yeah. [13]
On the strength of this, Universal submitted that Neon was obliged to call Mr Flower to give evidence as to how a "controversial matter" would have been dealt with. I do not agree that there was an "obligation" to call Mr Flower, but his absence left a hole in the evidence called that makes it difficult to accept assertions by Mr Lawson and Mr Sommer about "usual practice", and the absence of any word from Neon and/or Ms Cappuccio leaves unexplained a relevant part of what occurred, and what was expected to have occurred if the dance floor specifications had been given, or there had been a tick "yes" to "nightclubs".

(iii) Mr Sommer's Evidence

Mr Sommer was more polished, more articulate and more relaxed with giving evidence than Mr Lawson, but he too was in my view unreliable. His affidavit material put forward a template of asserted "usual practice", but it is evident that what occurred with Universal's renewal was not in fact dealt with that way, and the Matrix and Policy documents do not support Mr Sommer's assertions.
Mr Sommer was examined about why there was referral to London: Q. Are you aware of any other provision in the binding authority or the renewal matrix, including for hotels, and feel free to look at it if you wish, that requires a referral where there has been an increase of more than any particular percentage of the estimate provided for the previous period of insurance? A. May I have a look? Q. Of course. If you want the page number it's 543 for the renewal matrix. Feel free to look. What I wanted to suggest to you, that there isn't any provision, at least in the hotel matrix, that requires referral where there is an increase in any particular percentage of the turnover. Is that right? A. Correct. In the hotel matrix there is not. In the renewal matrix that you were referring to previously, that 20% is where the risk was previously referred to Lloyd's underwriters. Q. Do you know whether this risk was previously referred to Lloyd's underwriters? A. I don't recall off the top of my head, sorry, no. Q. Does this mean that if the reason for referral to Lloyd's underwriters is an increase by more than 20% of the turnover that that would indicate, at least to you, based upon your understanding of the renewal matrixes, that it must have earlier been referred to Lloyd's? A. Quite possibly, yes. Q. That's the only reason consistent with your understanding of the matrixes, isn't it? A. It could also have been referred to Lloyd's on the particular year that you're talking about because the overall turnover exceeded the ASR's underwriting authority. Q. I understand that, but I'm just talking at the moment about a percentage increase, that being the reason for referral. There is no other provision that I haven't taken you to that you are aware of, is there? A. No, the only provision of increased turnover is in that renewal matrix. Q. There is in the renewal matrix for hotels at 544 a requirement to refer where the turnover is greater than $3.5 million, isn't there? A. Yes. Q. There are also a number of other triggers that require referral to insurers before binding, aren't there? A. Yes. Q. You will see at the bottom of page 543 there is a reference to declinatures. You've drawn our attention to the nightclub/on site disco? A. Yes. Q. But if we go on to the referral to insurers before binding section on the next page ‑ would you do that? A. Yes. Q. The first of those is, "Any risk not falling within the above parameters," do you see that? A. Yes. Q. You read the, "Any risk not falling within the above parameters," are those risks under the heading declinatures, don't you? A. No. Q. What risks do you read that provision as referring to? A. The above the declinatures, so the provisions that start at the top with hotels not licensed as nightclubs right through down into declinatures. Q. But that's not describing parameters, is it? A. Yes, cause they're the parameters of the binding authority, the rating matrix, sorry. Q. It would be important on any renewal to go through each of the items that potentially required referral to insurers before binding, wouldn't it? A. Yes. Q. You will see that two of the questions refer to venues with dance floors exceeding 20 square metres. A. Yes. Q. It would be fundamental to proper underwriting practice to obtain information from the insured as to those matters both at original proposal time and at renewal time, wouldn't it? A. Yes. Q. Because otherwise you wouldn't know whether the binder required you to refer it to London. A. It ‑ unless it had previously been referred and you were looking at the file. Q. One of the things that you claim you did or would do ‑ perhaps I'll approach this slightly differently. It's your evidence, isn't it, that you can't actually remember this particular risk passing your desk in 2011? You don't have a specific - A. No, I don't. Q. Sorry, I interrupted you. A. No, I don't. I, I don't specifically recall this risk, no. Q. What you have done is you have looked at the documents and then tried to reconstruct what you think must have happened by reference to the way you often went about things. Is that a fair description? A. Yes. Q. One of the things that you would seek to ensure was that the underwriter was doing the work correctly and following the binder terms? A. Yes. Q. If you had looked at this risk carefully you would have seen that the underwriter was not doing the work correctly and following the binder terms because they hadn't got an answer to the question of how big the dancefloor was. That's right, isn't it? A. It ‑ I could have had a conversation with them but I don't specifically recall the account, so to answer the question, yes. Q. What this would suggest to you is that although you say that your practice was to seek to ensure the underwriter was doing the work correctly you don't think that he in fact did so in this case. That's right, isn't it? A. I would have looked at the entire file. Q. Yes, and you would have looked at the earlier proposal, wouldn't you? A. Likely. Q. That's what you claim you would have done. A. It's likely that I would have done that, yes. I would have looked at the file-- Q. On a renewal basis, though, where London has already accepted the risk, you would be inclined to accept the risk if London had already approved it, wouldn't you? A. For this particular risk, if it had been signed off, yes. Q. In other words, where London had ‑ there is a different practice that you would follow where London had already approved the risk, you wouldn't try and go and reinvent the wheel yourself, would you? A. No. Q. In other words, where London had already approved the risk you'd be inclined just to sign it off as approved? A. Yes. Q. Without the thorough investigation that you might otherwise undertake? A. I would do a review of the file to make sure that the procedures were followed and if it had been referred to London and London had seen the work, then I just made sure that the underwriter had produced the correct documentation, their premium calculations were correct. Q. You wouldn't do the full review that you might otherwise do if London had already preapproved it? A. I wouldn't re‑underwrite the risk myself, no. [14]
These are significant concessions in a context where Mr Sommer and Mr Lawson first put forward a position that ASR makes all the necessary decisions within the Matrix, including automatic declinature for anything resembling a nightclub, without referral to London.
Mr Sommer was asked about the ASR reporting structure: Q. Do you also report to a Mr Phillip Neilson? A. Yes, I did. Q. Both he and Mr Flower were above you in the hierarchy, were they? A. Yes. Q. And was Mr Neilson also involved in the hotel business? A. He was the underwriting manager at the time when he worked - when he worked at ASR, he was the underwriting manager. Q. He was still working there in 2010 and 11, wasn't he? A. I can't recall the specific date of when Mr Neilson left ASR, sorry. Q. Was Mr Neilson, whilst he was there, another person with whom you would discuss controversial proposals? A. Yes. Q. The sort of person that you would go to if Mr Flower wasn't available in circumstances where you were proposing not to renew an insured from your biggest referring broker? A. Yes. Q. Can I see if I can just refresh your recollection, go to page 518, that's the binding authority agreement, you'll see that Mr Neilson is still mentioned as a person with binding authority for the period 2010 to 2011, that is June 2010 to June 2011? A. Yes. Q. It would accord with your recollection, wouldn't it, that he was still there in January 2011? A. I don't recall whether he was still there, sorry. Q. You don't know one way or the other? A. No, I don't. Q. But in the case of a controversial nonrenewal of business from your biggest broker, you would have gone to at least either Mr Flower or Mr Neilson to discuss the matter? A. Yes. Q. If you had a controversial proposal that had come to you from your biggest referring broker, and you were considering not renewing it, you would ordinarily discuss that matter with the broker, wouldn't you, before coming to a final decision? A. Yes, you might well discuss it with the broker. Q. You ordinarily would do so, wouldn't you? A. Yes. What your concerns are you would have a conversation with them. Q. In circumstances where it's your biggest referring broker and you're considering not renewing it, you would often consider obtaining the views of the London underwriters about the matter, wouldn't you? A. You could do, yes. Q. That would be a matter that would often occur in such circumstances, wouldn't it? A. I wouldn't say often, but you could refer it to London for a second opinion.
Mr Sommer gave evidence that proper underwriting practice would have required the size of the dance floor be specified and if the enquiries revealed it was more than 20 square metres, the Matrix required referral to London: Q. If we could go to the underwriting matrix for hotels again, please? That's in the bundle at page 543, volume 2. A. Yep, I have it open, yep. Q. We went to part of this yesterday under the heading at 544, "Referral to Insurers before binding"? Have you got that part of the document?

A. Yep. 544, yep. "Referral to insurers before binding." Yeah. Q. Yes and that's an important part of the matrix as you understood it, isn't it? A. That's - yes, that's important, yeah. Q. Because you would need to find out whatever information was available from the insured or potential insured to identify whether or not referral to London was necessary, correct?

A. That's fair to say, yep. Q. If you'd been following appropriate underwriting practice, you would have asked questions and obtained answers sufficient to enable you to work out whether referral to insurers was required, correct?

A. That's correct, yep. Q. Now, you see that there's two of the items requiring referral to underwriters that are dependent upon whether a dancefloor exceeds 20 square metres, correct? A. I can see that, yep. Q. Accordingly, in order to properly undertake an analysis of whether referral was necessary, under the binder agreement, you would need an answer to the question of whether or not the dancefloor exceeded 20 metres, wouldn't you? A. That's correct, yep. Q. If you didn't go about getting that information that would suggest that there had been a breakdown in the processes by which you were examining the suitability of the risk for insurance, wouldn't it? A. I, I, I could have - I should have gone back and asked the size of the dancefloor, yep. I, I - yep, agree. Q. If you had been following what you claim to be your normal practice, would you have gone back and asked about the size of the dancefloor? A. My, my normal practice really is, is - when, when it comes to considering those dancefloor questions is to consider the, the, the - how often it is in fact used as a dancefloor. Q. If you had been following your normal practice, you would have insisted on an answer to the question about the size of the dancefloor, wouldn't you? A. The answer to the question - the next question was in relation to, you know, the number times a dancefloor is used-- Q. Could you focus on my question, please? Do you want it again? A. Yes, please. Yep. Q. If you had been following your normal practice in connection with the underwriting of this risk, you would have insisted on an answer to the question concerning the size of the dancefloor, wouldn't you? A. That's correct. Q. And the fact that you didn't indicates, at least in that respect, that you weren't following your normal practice, doesn't it?

A. That's correct. Q. May I suggest to you that one of the reasons you didn't follow your normal practice in this case was because it was a renewal and the business had been placed the earlier year without an answer to that question, is that right? A. I, I don't necessarily agree with that, no. Q. The reality is you can't remember dealing with this proposal at all, can you? A. This individual specific proposal back in two thousand and - in the period insurance started, no, not - no. [15]

The following day, Mr Sommer answered further questions in respect of the dance floor size issue: Q. One of the things that you would seek to ensure was that the underwriter was doing the work correctly and following the binder terms? A. Yes. Q. If you had looked at this risk carefully you would have seen that the underwriter was not doing the work correctly and following the binder terms because they hadn't got an answer to the question of how big the dancefloor was. That's right, isn't it? A. It ‑ I could have had a conversation with them but I don't specifically recall the account, so to answer the question, yes. Q. What this would suggest to you is that although you say that your practice was to seek to ensure the underwriter was doing the work correctly you don't think that he in fact did so in this case. That's right, isn't it? A. I would have looked at the entire file. Q. Yes, and you would have looked at the earlier proposal, wouldn't you? A. Likely. Q. That's what you claim you would have done. A. It's likely that I would have done that, yes. I would have looked at the file-- Q. On a renewal basis, though, where London has already accepted the risk, you would be inclined to accept the risk if London had already approved it, wouldn't you? A. For this particular risk, if it had been signed off, yes. Q. In other words, where London had ‑ there is a different practice that you would follow where London had already approved the risk, you wouldn't try and go and reinvent the wheel yourself, would you? A. No. Q. In other words, where London had already approved the risk you'd be inclined just to sign it off as approved? A. Yes. Q. Without the thorough investigation that you might otherwise undertake? A. I would do a review of the file to make sure that the procedures were followed and if it had been referred to London and London had seen the work, then I just made sure that the underwriter had produced the correct documentation, their premium calculations were correct. Q. You wouldn't do the full review that you might otherwise do if London had already preapproved it? A. I wouldn't re‑underwrite the risk myself, no. [16]
Mr Sommer was questioned about what renewals were referred to London. He said this was about 10%, and of that 10%, 50% to 60% related to renewals where the turnover had increased and the remaining 30% to 40% were where ASR sought guidance from Neon about whether cover could be given (under the terms of the Binding Agreement): Q. If we go to paragraph 33 of your affidavit, you see that you say that around 90% of referrals to London were on the basis that you were recommending the quote terms? A. Yes. Q. It follows doesn't it that there was 10% that you'd refer to London on the basis that you were recommending not quote terms? A. No, the 10% of referrals to London that I would have - that we would have done would have been for second opinion on, on risks that we may not have been sure of. The 90% of referrals to London is where the risk exceeds our underwriting authority in house. So the risk itself qualifies, the underwriting authority, in terms of acceptability of risk. The only reason we are referring to London is that it may have triggered - and as I gave in my example, it exceeded three million in turnover. Q. But hold on a minute, is the 90% referable to matters that you were required to refer to London by reason of the matrix, is that what you say? A. Correct. Q. That means that the 10% that you were referring to London were matters that you were not required to refer under the matrix, is that right? A. No, I say there that we were recommending to quote terms. The 10% could have been, we're not sure whether we want to offer terms on this account, can you give us your opinion? Q. All right and in terms of referrals to London, by reason of the criteria in the matrix, it was quite frequent that you had to refer matters to London, wasn't it? A. Sorry, could you repeat that question? Q. I'll try something a little bit clearer. Sorry about that. A. That's okay. Q. There are a number of criteria in the hotel matrix and in the renewal matrix that meant that if certain features existed in the proposal, meant that the referral had to be made to London, correct? A. Correct. Q. I'm just trying to get an idea about the proportion of the hotel business that would get referred to London by reason of that feature. Would it be 50%? A. I'm just trying to recall, sorry. Q. I'm talking about 2011 of course, or thereabouts. A. Yeah. Could have been 50, 60, 70% could require referral, but that's hearsay, I, I don't specifically have those numbers, sorry, off the top of my head now. Q. That's all right, we don't expect you to. But 50, 60, 70% of the business that you ultimately wrote would go to London for approval, is that right? A. It could have, yes. Q. Of that order. A. Yes. [17]
Mr Sommer was questioned about specific information he had in order to be able to prepare his affidavit material. He appeared to have no knowledge of the summary of indemnity files Mr Lawson mentioned in his evidence: Q. You've sworn two affidavits in these proceedings. Were you at a point in time provided with information as to searches that had been undertaken by ASR of its records in relation to matters that might be relevant to the evidence you were going to give? A. I'm sorry, I don't understand that question. Q. Yes, let me be more precise about it. Were you provided with some documentation that recorded some 16,000 odd items that had been pulled together as a result of a search? A. Not that I can recall. Q. Were you provided with a spreadsheet of a dozen matters that were thought that might be relevant to the evidence you were going to give? A. Not that I can recall, no. Q. Were you provided with a spreadsheet of about a dozen items containing information about proposals where there'd been a nightclub disclosed, or alternatively nightclub activities that might be inferred? A. Not that I can recall. [18]
Mr Sommer was then taken to the Policy Renewal he signed on 28 January 2011. He agreed that the Policy Renewal document included a representation that a nightclub, or nightclub activities in a hotel could be covered and that assertion is inconsistent with the asserted "practice" of immediate declinature. Mr Sommer still insisted that was his practice and "the practice" he had been taught: Q. Let's look at the document at 669. You will see that it starts off saying: "A licenced hotel or motel licenced as such by the appropriate state licencing laws whose principal is that of a hotel or motel and who abide by the state licencing obligations." Do you see that?

A. Yes. Q. Then the form says, "Any insured hotel or motel may, from time to time, provide live entertainment or dancing"?

A. Yes. Q. That's a representation that ASR is making to its insureds or proposed insureds? A. Yes. Q. Then you see it goes on to say, "However, if this activity is undertaken" and then there's six numbered points. Just read those six numbered points to yourself, please? A. Yes. Q. If we look at what the form says, it says, "However, if this activity is undertaken" and then there's points 1 to 5 and then it says then "such activities are specifically excluded under this policy." A. Yes. Q. But then it goes on to say: "Underwriters may agree not to exclude such activities listed above provided full details are submitted to them and an additional premium, if any, is paid to the cover to cover these activities." Do you see that?

A. Yes. Q. That's the representation that ASR was making on behalf of underwriters to its insureds or proposed insureds, wasn't it?

A. Yes, it is. Q. It was indicating that underwriters may agree not to exclude activities such as nightclubs, wasn't it?

A. It's, it's stating that the activities listed 1 through 5 they may consider. Q. Item 3 is "as a nightclub or as marketed as such or is signed or termed as a nightclub"? A. Correct. Q. And this is indicating to insureds or proposed insureds that underwriters may agree not to exclude such activities provided full details are submitted and an additional premium paid, isn't it? A. Correct. Q. What I want to suggest to you is that is the way in which underwriters and ASR conducted themselves in relation to risks falling within the hotel rubric that might involve nightclub or nightclub activities? ELLIOTT: I object to that question. It's very vague. HER HONOUR: Yes, can I just have that question again? I was having trouble grasping it as you articulated it. I might have that question read back, if you don't mind, Mr Monitor? Thank you. PLAYBACK HER HONOUR: Yes, it's too general. There's a leap there from what's in the document to what everybody does or what's generally done. There's a distinction between what's in the document that's able to be done to asking this witness what he understands in a way everybody does. I think there's a fine line but I think it's crossed. Just let me hear again from Mr Elliott. Mr Elliott, what's the precise objection? ELLIOTT: If my learned friend wants to ask a specific question about a particular activity and how it was in fact handled to this witness' understanding and observation, he can do that. But to put a very general question that went something along the lines of "and that's the way," whatever that means, "that's the way-- HER HONOUR: That's the way it's done. ELLIOTT: --people conducted themselves generally." HER HONOUR: Although the word "generally" isn't articulated, that seems to be implied in the question. I don't know that that's a fair question to ask this witness but-- WILLIAMS: If your Honour doesn't think it's fair, I should put something your Honour does think is fair. HER HONOUR: Yes. WILLIAMS Q. Could you just go back to the document at 669?

A. Yes. Q. You see that it says, "Underwriters may agree not to exclude such activities listed above"? A. Yes. Q. ASR are referring there to items 1 to 5, aren't they?

A. Correct. Q. Item 3 is "a nightclub or is marketed as such or signed or termed as a nightclub," do you see that?

A. Correct, correct. Q. And this is telling people that underwriters may agree not to exclude such activities, isn't it?

A. It does state that they may not - they may agree not to exclude it, yes. Q. What I want to suggest to you is that is inconsistent with what you claim was the practice in 2010 and 2011, isn't it?

A. It is my understanding that nightclubs were never an acceptable risk. Q. So is this the case that you were telling people something that was wrong? A. I don't know the answer to that question, sorry. Q. ASR is making a specific representation, isn't it, that each of the matters 1 to 5 may not necessarily be excluded from cover and that underwriters may agree to cover them, doesn't it? A. It says that they may agree to it, it doesn't, it doesn't say that they will agree to it. Q. And that is the position, wasn't it, that underwriters from time to time did agree not to exclude matters of this - that are described in 1 to 5?

A. No, it is my understanding that nightclubs were never an acceptable risk. [19]

I simply do not accept Mr Sommer's or Mr Lawson's evidence on this issue. It appeared to me to be opportunistic and not supported by ASR and Neon's tendered documents as to what potential policy holders were informed and what the Underwriting Matrix said should occur.
Mr Sommer acknowledged that there were no questions raised by him or Mr Lawson about the answer "DJ and cabaret" given in the box that asked for details regarding" live entertainment: Q. The understanding that you claimed to have in 2010 and 2011 in that regard is not recorded in any document, is it? A. The underwriting matrix for the hotel, motels records that nightclubs are a declinature. Q. It goes on to talk about referrals to London in circumstances where the parameters in the matrix are not met, doesn't it?

A. Correct. Q. That would indicate that it was at least open to you to send a controversial application that might have features that some people might describe as a nightclub and others might not to London for approval?

A. You could refer a controversial application to London for review. Q. What might appear to some people to be a nightclub might be described differently by others, that's fair, isn't it?

A. One person's opinion is always different to another's in most circumstances. Q. For example, you interpret DJ activity as being some sort of ambient music, don't you?

A. Yes, I said DJ was not live entertainment. Q. But, you see, a DJ could equally be very loud dance music, couldn't it?

A. Correct. Q. Unless you asked further questions about the nature of the DJ activity, you wouldn't know whether it was ambient music or loud dance music, would you?

A. Correct. Q. And you didn't bother to ask, did you?

(iv) A question mark over the admissibility of the John Flower affidavit regarding the 2020 Subpoena

An issue was raised about whether I should receive into evidence an affidavit of John Flower sworn 30 March 2020 in relation to the costs and difficulties associated with responding to a three paragraph subpoena seeking certain underwriting information from ASR. Universal argued that the affidavit showed a disingenuous approach to available documentation given Mr Lawson's evidence about file searches he said had taken place and the preparation of a summary of files.
Universal argued that there are three non-hearsay purposes for which the affidavit can and should be received into evidence. First, it establishes that Mr Flower was able to give evidence and the nature of the evidence he could give. Second, that it is conduct to take into account when weighing and assessing the conduct of a party to the litigation and the evidence it has chosen to present or not present. Third, the affidavit contained admissions regarding certain relevant facts, and so are exceptions to the hearsay rule under ss 60, 81 and 87 of the Evidence Act 1995 (NSW).
Neon argued that the material is irrelevant and hearsay and was prepared for a pre-trial argument that was resolved between the parties, and so the affidavit should not be received.
I agree with Neon's position and decline to admit the affidavit into evidence. In any event, the status and availability of Mr Flower is already known from Mr Lawson's evidence. The fact that some possibly relevant summary of underwriting material was prepared and not before the Court was referred to by Mr Lawson. There remains gaps in Neon's evidence that it chose not to fill, proceeding no doubt on the basis that the evidence it had called (Mr Lawson, Mr Sommer, Mr Ashraf and the documents it tendered) was sufficient to satisfy its onus of proof. It was not.

Decision

Senior counsel for Neon submitted that ticking the box "no" for the word "Nightclub" on the questionnaire was deliberately misleading in circumstances where the basement of the Civil Hotel had the physical accoutrements it had, the promoters referred to the basement area when they used it as a "nightclub", and where it had been the subject of development applications that referred to "nightclub" in documents and descriptions (prepared by others) and submitted to Council. He submitted that the evidence proves that the basement was used in that "nightclub" format on many occasions before the questionnaire was completed. It was promoted as a "nightclub" where dancing and live music would occur. These pursuits were organised by Universal or by a promoter pursuant to arrangements with Universal, and it does not matter whether it was Universal or a promoter organising the events, Universal knew this activity in the basement corresponded with the "nightclub" definition in the questionnaire.
Whether Universal in fact operated a "nightclub" as defined in the policy at the time the renewal form was submitted is but a small part of the relevant issue. The issue is whether Mr Kospetas thought that Universal had something that corresponded to that definition, and did he believe that it was relevant to the basis upon which Neon would offer insurance or would or should a reasonable person in his position think it did, and would or should such a person understand that it was relevant to whether, and if so on what basis, Neon would offer cover.
On close lawyerly hindsight analysis, seizing on indicia and events and marrying them up with a forensic focus, it could be concluded that Universal had in its basement, on occasion, an event or arrangement occurring that might correspond to the definition of "Nightclub" in the policy. However that is not a proper basis on which to assess what Mr Kospetas, or a reasonable person in his position - a manager of a three storey mixed use hotel - knew or should have known. He needed the "Premises" covered. The policy professed to exclude anything with a whiff of "nightclub" associated with it, so why would Mr Kospetas, or a reasonable person in his shoes, critically evaluate a possible part of its business operation that might correspond to the definition of something automatically excluded?
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 Mr Kospetas 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.
In any event, it was made clear activities like this would not be covered. How or why, in those circumstances a reasonable person would leap to the illogical conclusion that if there was a nightclub area/attitude/activity in the hotel, the insurer would refuse to insure the whole three story premises, defies common sense. It is not what the Policy document states.
I am not satisfied that there has been a misrepresentation by Universal regarding "nightclub". Nor has there been any relevant misrepresentation regarding "disco" or "frequent dancing". Any duty of disclosure relating to "dance floor" was effectively waived under s 21(3) because that answer was obviously incomplete, and Neon/ASR did nothing to pursue that. (I note that the same absence of information featured in the initial proposal document. It seems that too was never followed up).
Even if I am wrong about that, s 26 of the ICA protects Mr Kospetas because I have concluded that 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.
Second, I do not believe Mr Kospetas, or a reasonable person in his position, could be expected to know that those assertions in issue would be relevant to the insurer and its decision to cover the premises at all, or to issue cover on terms.
It follows that Neon is not entitled to any relief under s 28 of the ICA. Even if it was, Neon has not persuaded me that it would have refused to insure the premises. The evidence on that issue was contradictory and in respect of the evidence of the underwriters, incomplete and unsatisfactory.

Conclusion

It follows that the questions posed should be answered as follows: 1. No. 2. No. 3. No.

Endnotes

Tcpt, 10 July 2020, at p 441(1)-(23)
Tcpt, 10 July 2020, at p 441(48) to p 442(19)
Tcpt, 10 July 2020, at p 443(1)-(26)
Tcpt, 06 July 2020, at p 77(30) to p 78(40)
Tcpt, 06 July 2020, at p 67(45) to p 70(40)
Tcpt, 06 July 2020, at p 93(40)-(50)
Tcpt, 06 July 2020, at p 95(15)-(38)
Tcpt, 07 July 2020, at p 108(35) to p 109(38)
Tcpt, 07 July 2020, at p 106(17)-(18)
Tcpt, 07 July 2020, at p 106(49) to p 107(8)
Tcpt, 07 July 2020, at p 112(5)-(18)
Tcpt, 07 July 2020, at p 121(17)-(31)
Tcpt, 07 July 2020, at p 137(3)-(41)
Tcpt, 07 July 2020, at p 178(40) to p 181(34)
Tcpt, 07 July 2020, at p 115(16) to p 116(33)
Tcpt, 07 July 2020, at p 180(40) to p 181(33)
Tcpt, 08 July 2020, at p 193(28) to p 194(29)
Tcpt, 08 July 2020, at p 201(41) to p 202(9)
Tcpt, 08 July 2020, at p 205(1) to p 207(27)
Tcpt, 08 July 2020, at p 208(4)-(35) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 June 2022

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