Crime link no barrier to claim payment

An insurer has lost a long-running court battle after trying to deny indemnity for a brothel fire because the brothel owner's directors were associated with a bikie gang.

In the latest ruling, the NSW Appeal Court said Calliden knew its specialised adult entertainment cover might attract people of "ill repute" and therefore could not deny liability on those grounds.

In separate but concurring judgements, Justices John Meagher and Julie Ward and Acting Justice Ronald Sackville said Calliden's deliberate attempts to attract adult industry business showed the insurer was willing to risk insureds' potential criminal involvement.

They overturned NSW Supreme Court Justice Monika Schmidt's 2015 ruling Calliden was entitled to deny brothel owner Stealth Enterprises Pty Ltd liability because the directors and brothel managers, brothers Baris and Fidel Tukel, had not disclosed their associations with the Comancheros bikie gang.

Stealth was seeking $500,000 after its ACT brothel, The Gentleman's Club, was destroyed by fire on 1 January 2012.

The parties have been through numerous court actions since then.

Stealth had appealed against Justice Schmidt's ruling on the grounds a reasonable person could not have known the brothers' bikie membership was relevant to the brothel's insurance; and Calliden would have insured the brothel regardless.

On 5 April, the Appeal Court agreed and found Justice Schmidt had erred when she concluded Calliden would have rejected the brothel if it was aware of the bikie link.

Justice Meagher said Stealth was open about the club's operations as an adult entertainment venue, including that people of poor character were likely to be on the premises. "Calliden specifically targeted so-called ‘adult industries', including brothels," Justice Meagher said.

"An underwriter not only specialising in [brothels] but actively seeking their business would expect people with criminal connections, including members of bikie gangs, were likely to be involved in use of the premises. It was the sort of association [Calliden] would take into account as part of the general risk of insuring a brothel."

He said Calliden never specifically inquired about criminal connections and asked only about convictions in the past five years. Stealth had answered those questions honestly.

AJ Sackville said Calliden appreciated brothels were likely to have criminal involvement but that did not deter it from seeking adult entertainment business. He said there was no evidence Calliden had ever declined coverage because an insured had or was suspected of having bikie gang links or even that Calliden had inquired about links. "That was notwithstanding its knowledge of the involvement of members of such gangs and other persons of ill-repute in that industry."

Justice Ward said she had "some difficulty" accepting Stealth did not think the bikie connection was relevant to its policy but believed Calliden would have insured the brothel even if it was aware of the brothers' bikie associations. The court ordered Calliden to pay Stealth $500,000 plus costs.

In a November 2015 judgement, Justice Schmidt had ordered costs and interest be paid to Calliden on an ordinary basis to 28 October 2014 and an indemnity basis from then until 29 October 2015. She said that reflected Stealth's' rejection of Calliden's October 2014 compromise offer.

In her September 2015 ruling, Justice Schmidt said the fact the brothel licence had expired when the fire occurred also was relevant. The brothel's ACT registration to operate had expired shortly before the renewal.

The Tukels had earlier tried to have evidence of their bikie membership barred from the trial but, when that failed, they argued bikie membership was irrelevant. Calliden said a reasonable person would have known of the link between bikie gangs and crime and informed the insurer. The insurer argued it would not have incepted or renewed cover had it been aware of the club membership or the registration lapse.

Justice Schmidt rejected Stealth's argument it did not have to disclose directors or staff's private activities, or that a reasonable person would be unaware the bikie connection was relevant. She said: "The criminal activity of bikie gangs … is of considerable ongoing interest and concern to members of the community. The criminal activities of bikie gangs are likely to be of much greater notoriety and interest to the community than [crimes like] tax avoidance in the building industry."

Justice Schmidt said a reasonable person would know of the link and be aware of the need to tell an insurer. She accepted Calliden's argument it would not have issued or renewed the policy had it known of the bikie connection or the registration lapse.

In December 2013, the NSW Supreme Court had granted Calliden leave to administer 33 interrogatories to obtain information it wanted to use in the trial, despite a June 2012 ruling Calliden's case "a fishing expedition".

After the June decision, Calliden sought orders the Tukel brothers be required to respond to a series of questions. Acting Justice Graham Barr ordered Stealth to provide written answers to most of the interrogatories Calliden had posed within 21 days. AJ Barr said requiring answers about the brothers' Comancheros gang membership was "likely to save time and costs and is reasonably necessary to dispose fairly of issues likely to arise at trial".

He said Calliden wanted to argue gang membership should have been disclosed because it "gave rise to a moral hazard".

AJ Barr agreed gang membership, its length, and the directors' seniority in a gang, were relevant to assessing moral hazard. Because Calliden was "largely but not altogether successful" in its action to pursue the answers, he ordered Stealth to pay half its costs. 

Calliden had discovered the bikie links in media reports while investigating the claim.  In the June 2012 hearing, the parties agreed an insured's connection with "undesirable or criminal elements" was relevant but Stealth argued there was no "averment" of a connection of that kind and Calliden was not entitled to the information sought.

Justice Joseph Campbell had ruled Stealth's obligation was restricted to providing "reasonable information" and assisting Calliden in the claim. "The condition does not extend ... to compel the insured to provide additional information about circumstances surrounding the insured's entry into, or renewal of, the policy."

Calliden had issued subpoenas to the federal and NSW police, seeking documents on the Tukels' association with any motorcycle clubs. Justice Campbell said the subpoenas were "a fishing expedition" and should be set aside. He said Calliden had not relied on any averment the Tukels failed to disclose an association or connection with undesirable or criminal elements when Stealth entered into the contract.

Justice Campbell ruled subpoenaed documents Calliden had received be returned or deleted. He ordered Calliden to pay Stealth's costs.

Stealth Enterprises Pty Ltd t/as The Gentleman's Club v Calliden Insurance Ltd [2017], NSWCA 7, 05/04/2017

Stealth Enterprises Pty Ltd t/as The Gentleman's Club v Calliden Insurance Ltd (No 2) [2015], NSWSC 1691, 12/11/2015 

Stealth Enterprises Pty Ltd t/as The Gentleman's Club v Calliden Insurance Ltd [2015] NSWSC 1270, 03/09/2015

Stealth Enterprises Australia Pty Ltd t/as The Gentleman's Club v Calliden Insurance Ltd [2013], NSWSC 1757, 28/11/13

Stealth Enterprises Australia Pty Ltd v Calliden Insurance Ltd [2013], NSWSC 825, 20/06/2013