State Insurance General Manager v Mchale CA244/89, 20 December 1991

Facts

Mr and Mrs McHale, who were second mortgagees and former owners of a house, purchased it at a first mortgagee's sale on 23 May 1984. The property had been let by the previous owner to members of the Highway 61 motorcycle gang. The McHales insured the house with the State Insurance Office. On 28 May 1984, Mr McHale gave the occupants notice to quit. They vacated over the Queen's Birthday weekend (ending 4 June 1984) after a party, leaving the house in disarray. Over the following weeks, the McHale family worked on the property to prepare it for sale. On the night of 7-8 August 1984, the house was completely destroyed by a fire lit by an unknown person or persons. The insurer declined liability on several grounds, including an allegation (not pursued on appeal) that Mr McHale had arranged the fire, and various allegations of non-disclosure, breach of policy conditions, and fraudulent statements, primarily concerning the tenants' status as gang members.

Held

1. An insurer seeking to avoid a policy for non-disclosure must establish on the balance of probabilities not only that the insured knew a primary fact (such as tenants being gang members), but also that the insured knew, or ought to have known, the significance of that fact in relation to the insurance risk (i.e., that the presence of those tenants created a special risk of damage).
2. In this case, the appeal was dismissed because the insurer failed to prove that the insureds had the requisite knowledge that the tenants' membership of the Highway 61 gang was likely to lead to damage to the property.

Cooke P concurring.

The appeal is dismissed.

Cases mentioned in judgment

• Avon House Ltd v. Cornhill Insurance Co. Ltd (1980) 1 A.N.Z. Ins. Cas. 60-429

• Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514

• Blackley v. National Mutual Life Association [1970] N.Z.L.R. 919

  Applied

• Carter v Boehm (1766) 3 Burr 1905, 1909; 97 ER 1162, 1164

  Followed

• Container Transport International Inc v Oceanus Mutual Underwriting Association (Bennuda) Ltd [1984] 1 Lloyd's Rep 476

• Guthrie House Ltd v. Cornhill Insurance Co. Ltd (1982) 2 A.N.Z. Ins. Cas. 60-466

• Home v Poland [1922] 2 KB 364

• Joel v Law Union and Crown Insurance Co [1908] 2 KB 863

• Lambert v. Co-operative Insurance Society Ltd (1975) 2 Lloyd's Rep. 485

• Life Association of Scotland v. Foster (1873) 11 Macpherson 351

• Marene Knitting Mills Pty Ltd v. Greater Pacific General Insurance Ltd [1976] 2 Lloyd's Rep. 631

  Applied

• Mutual Life Insurance Co. of New York v. Ontario Metal Products Co. Ltd [1925] A.C. 344

  Applied

• New Zealand Insurance Co. Ltd v. Forbes (C.A. 178/86; judgment 22 August 1988)

• Roberto v Hartford Fire Insurance Co (1949) 177 F 2d 811

• [1972] N.Z.L.R. 1038

Legislation mentioned

• Insurance Law Reform Act 1977, s 5, s 6, s 6(2)
• Insurance Contracts Act 1984 (Cwth), s 21