New South Wales District Court CITATION: Ferryboat Pty Limited & Red Gecko Pty Limited v JUA Underwriting Agency Pty Limited & Others [2008] NSWDC 209 HEARING DATE(S): 21/7/08 - 24/7/08, 25/8/08 and 22/9/08 JUDGMENT DATE: 22 September 2008 JURISDICTION: Civil JUDGMENT OF: Rolfe DCJ DECISION: Verdict and Judgment in favour of Ferryboat Pty Limited against the Defendants in the amount of $413,411.43. There will also be a Verdict and Judgment in favour of Red Gecko Pty Limited against the Defendants in the amount of $182,782.73. CATCHWORDS: Contract of Insurance - Claims resulting from fire rejected on grounds of material non-disclosure - Consideration of compliance by Insurers with s 22 of Insurance Contracts Act 1984 - Consideration of whether matters of alleged non-disclosure were material from underwriters' point of view - Whether such matters were actually known by insureds or were matters which a reasonable person in the insureds' position could have been expected to know - Claims for cost of reinstatement as against indemnity - Whether insureds suffered loss - Consideration of valuation evidence LEGISLATION CITED: Insurance Contracts Act 1984 (Cth) Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 at 615 Prime Forme Cutting Pty Limited v Baltica General Insurance Co. Limited (1991) 6 ANZ Ins Case 61-028 CASES CITED: Permanent Trustee Australia Co Limited v FAI General Insurance Co Limited (1998) 10 ANZ Ins Cas 61-408 CGU Insurance Limited v Porthouse (2008) HCA 30 (30 July 2008) paras 52-53 Bakerland Pty Ltd v Coleridge (2002) NSW CA 30 TEXTS CITED: MacGilllivray & Parkington on Insurance Law 10th Ed para 19-21 Ferryboat Pty Limited (1st Plaintiff) PARTIES: Red Gecko Pty Limited (2nd Plaintiff) JUA Underwriting Agency Pty Limited & Ors (Defendants) FILE NUMBER(S): 5728/05 COUNSEL: L V Gyles (Plaintiffs) J V Gooley (Defendants) JUDGMENT 1 The first plaintiff, Ferryboat Pty Limited ("Ferryboat"), was the registered proprietor of the property known as 96-98 Loftus Street Bundeena (the "Premises"). 2 The second plaintiff, Red Gecko Pty Limited ("Red Gecko"), conducted the business known as the Bundeena Café (the "Business") from the building at the Premises. Red Gecko was the owner of the trading stock of the Business. Both Red Gecko and Ferryboat owned plant and equipment which was used in the Business. 3 The plaintiffs' case is that on or about 24 September 2002 they entered into an agreement with the defendants (the "Agreement") pursuant to which the defendants agreed, in consideration of payment of a premium of $3,566.04, to pay to the plaintiffs amounts up to the sums insured for property damage at the Premises caused by fire during the period from 26 September 2002 to 26 September 2003 on the terms and conditions set out in the policy document (the "Policy"). The relevant Policy is Annexure B to Mr Bell's affidavit of 24 November 2006, exhibit C. It has the following footer on it: "Nadic-JUA Restaurant Wording v 6220702". In this respect, on balance, I am satisfied on the evidence that the policy document at exhibit G.34 with the footer "Nadic-JUA Restaurant wording v 5.200602" is an earlier draft version. I am further satisfied, based on the matters which arose in the cross-examination of Mr Dardaneliotis, that the policy document which is exhibit CD1 to his affidavit, exhibit 3, was also only a draft document. In any event, both counsel agreed that nothing would turn on the Court's finding as to which of the three documents constituted the Policy. 4 On 23 June 2003 Ferryboat requested Nadic Insurance Brokers to increase cover for fire under the Policy up to $350,000 for buildings and $125,000 for contents. The defendants agreed to this request. 5 On 7 August 2003 the buildings, plant, machinery, stock and other contents belonging to the plaintiffs were either destroyed or badly damaged by a fire at the Premises. Accordingly, the plaintiffs lodged a claim with the first defendant under the Policy in respect of the damage done to their property by the fire. 6 Subsequently, the defendants refused to indemnify the plaintiffs under the Policy and so the plaintiffs brought these proceedings claiming damages for their losses in respect of the following items: (a) Buildings (b) Contents (c) Stock and (d) Demolition and removal of debris expenses. 7 In the defendants' amended defence at paragraph 8 (q) the defendants plead that it was a term of the Policy that the plaintiffs had a duty to disclose to the defendants prior to the Agreement being entered into every matter which was known to the plaintiffs, being a matter that: (i) the plaintiffs knew to be a matter relevant to the decision of the defendants whether to accept the risk and if so, on what terms, or (ii) a reasonable person in the circumstances could be expected to know to be a matter so relevant. 8 The defendants plead that this term is implied by law, specifically, s 21 of the Insurance Contracts Act 1984 (Cth) (the "Act"). The plaintiffs did not dispute the existence of this implied term. 9 In paragraph 8(r) (i)-(vi) of their amended defence the defendants allege that the plaintiffs did not disclose to the defendants the matters therein set out when they requested Nadic Insurance Brokers to increase the cover in relation to the Premises to $350,000 and to the increase in fire cover for contents to $125,000. 10 In their reply, the plaintiffs do not admit that the defendants complied with their obligations under s 22 of the Act and therefore say that the defendants cannot rely on the alleged failures to disclose pleaded in paragraph 8 (r) of the Amended Defence. 11 The background to the case is as follows. 12 David Walter Bell is the director of Ferryboat and his wife Deborah June Grey is the director of Red Gecko. Mr Bell's evidence in exhibits C and D was that for most of the time between 1987 until mid 2001 he and his wife lived in Tasmania and he conducted the business of an abalone diver. Mr Bell acquired abalone licences and quotas, some of which he still owns, as well as having an interest in an abalone business in Tasmania. 13 After retiring from diving in the year 2000, Mr Bell and Ms Grey looked for a small business to acquire. Through a mutual friend they became aware that the Premises were for sale. They made enquiries on the internet and with the selling agent. The Premises had development potential. It consisted of two lots of land on one of which there was a building with a heritage classification which was leased to the operator of a takeaway business. The adjoining lot comprised vacant land. 14 Ferryboat purchased the Premises for $1,250,000. Settlement occurred on 22 May 2001. Approximately half of the funds needed to purchase the Premises were borrowed from the ANZ Bank through its branch in Launceston and the balance was provided through Mr Bell selling two abalone licences. 15 After contracts for the purchase of the Premises had been exchanged, Mr Bell retained Cameron Jones and Cameron Brooks of Innovative Building Designs to advise on the development potential of the site and to prepare documentation which would form the basis of a development application to Sutherland Shire Council. 16 Mr Bell's evidence was that he and Ms Grey intended to establish and run a café/restaurant once the existing lease on the takeaway business expired in September 2001. Indeed, once the tenant vacated the Premises, the plaintiffs upgraded the kitchen facilities, purchased new furniture, repainted and cleaned it up. They also installed an alarm. While these works were being completed the business was continued under the name Bundeena Café. 17 It was the plan of Mr Bell and Ms Grey to establish a more formal dining restaurant in the Premises and to install a friend of theirs, Matthias Hofstetter as chef. Mr Hofstetter was an experienced executive chef who was retained by the plaintiffs to advise them about the restaurant. The plaintiffs' intention was to trade the restaurant business under the name "Red Gecko Restaurant". 18 By around March 2003 the Red Gecko Restaurant had been established and was trading from the first floor of the renovated Premises. The Business was operating as a takeaway at the downstairs level. 19 After completing the purchase of the Premises in May 2001, Mr Bell arranged insurance cover through Mr Parker of Nadic Insurance Brokers. The cover arranged was not placed with any of the defendants. Mr Parker had been recommended as an experienced broker in the café and restaurant field by Mr Bell's brother who operated a fish café in Surry Hills. 20 In response to a telephone inquiry by Mr Bell, Mr Parker forwarded an insurance quotation offering insurance for the building of $250,000 and public liability cover of $5,000,000 for an annual premium of $1,438.58. 21 The premium was paid by Mr Bell on 25 May 2001 and on 6 June 2001 Mr Parker sent a letter to Mr Bell on behalf of Ferryboat enclosing a tax invoice in respect of this payment, together with a proposal form (exhibit C paragraph 9; exhibit 1.9). 22 On 4 July 2001 Mr Bell completed the proposal form on behalf of Ferryboat and returned it to Nadic on 9 July 2001. 23 Around about the time Red Gecko was to take over the running of the business, Mr Bell contacted Mr Parker seeking insurance cover in respect of contents, stock and public liability. Mr Parker again provided a quotation for Red Gecko having discussed the matter with Mr Dardaneliotis of JUA Underwriting Pty Limited, the first defendant ("JUA"). It was proposed that the policy would be for the period 26 September 2001 to 26 September 2002 and would cover contents in the amount of $40,000, stock in the amount of $5,000 and public liability in the amount of $5,000,000 (exhibit 3 annexure G). 24 On 2 October 2001 Mr Dardaneliotis of JUA advised Mr Parker that the request for cover for Red Gecko had been confirmed (exhibit 1.42). 25 On 3 October 2001 Nadic send a memorandum of insurance for Red Gecko along with a schedule of cover to Mr Bell. The schedule stated that the policy was for the period 26 September 2001 to 26 September 2002 and covered contents in the amount of $40,000, stock in the amount of $5,000 and public liability in the amount of $5,000,000. The insurers were stated as "Certain Underwriters at Lloyds. QBE Insurance (Australia) Limited" (exhibit 3 annexure K; exhibit 1.45-48). 26 In relation to the Policy, a proposal was ultimately filled in by Mr Bell on behalf of Red Gecko on 9 January 2002 (exhibit 1.49-51). 27 Mr Bell said in cross-examination that he recalled seeing at the time the reference to the fact that the Policy was to be "underwritten by JUA Underwriting" (T 44.45). Mr Bell also said that at the time he signed the proposal he had read the details contained in it under the headings "Important Matters referred to in the Insurance Contracts Act", "Duty of Disclosure", "Non-disclosure" and "Declaration" (T 45.36 and T 46.1). 28 This evidence related to the following details set out in the proposal at pages 2 and 3: "Important Matters referred to in the Insurance Contracts Act 1984" – "YOUR DUTY OF DISCLOSURE" Before you enter into a contract of general insurance with us, you are required, under the Insurance Contracts Act 1984, to tell us everything you know, or could reasonably be expected to know, which may affect our decision whether to accept your insurance or the terms under which we accept it. You have the same requirement to disclose any additional or new information before we agree to renew, extend, reinstate or change any details relating to your contract of general insurance. You are not required to tell us anything: . that will reduce the possibility of loss, damage or liability arising out of your contract of general insurance, . that is common knowledge to the general public, . that we already know about, or ought to know about through our business, . which we have stated will not affect our decision whether to accept your insurance or the terms on which we accept it. NON DISCLOSURE If you do not comply with your duty of disclosure, we may be entitled to reduce the amount of any claim settlement or we may cancel your contract of general insurance. If you have told us something that is fraudulent, we also have the option of cancelling your contract of general insurance from the effective date stated in the initial schedule. DECLARATION I/We have read the Duty of Disclosure and all the information on the front page of this proposal and understand all of this information. I/We confirm that all information known to me/us, that may affect your decision whether to insure me/us or not and what terms and conditions to offer has been included or attached to this proposal. I/We agree that all information provided shall be considered as information provided by me/us and all of the persons or parties to be insured. Those answers are not in my/our own handwriting have been checked by me/us and I/we certify they are correct. I/We authorise you to give insurance related information to and obtain insurance related information from Insurance Reference Services Limited (or any similar organisation) or any insurance company; and This declaration is made on behalf of all Directors, Partners and Proprietors of the Business Insured." 29 Ferryboat's building and public liability insurance which, as mentioned earlier, had not been underwritten by JUA, came up for renewal on 22 May 2002. In this respect, Mr Parker's evidence was that he wanted to consolidate the insurance for both Ferryboat and Red Gecko through the same underwriting agency. Accordingly, on 16 May 2002, Nadic Insurance Brokers gave instructions to JUA, first, to endorse the policy by adding Ferryboat as an insured and, secondly, in respect of cover, to add $250,000 under the fire section in relation to the building at the Premises and in relation to public liability to put cover in place up to $5,000,000. The email Mr Parker sent was in the following terms: "Please endorse policy effective 22/05/02 as follows:- Insured: Add Ferryboat Pty Limited (same directors) Cover: Add Fire Section – Building - $250,000." 30 Mr Dardaneliotis of JUA confirmed the cover on 16 May 2002 and an endorsement was sent to Mr Bell on 21 May 2002 (exhibit 1.57). The practical effect was that Ferryboat was now covered under the Policy until 26 September 2002. 31 Neither at the time Ferryboat became covered under the Policy nor subsequently during the period of insurance was any proposal filled in by Ferryboat. 32 The Policy was due for renewal on 26 September 2002. Before it was renewed, Mr Bell received a letter from Mr Parker dated 20 September 2002 (exhibit G.117) suggesting certain work be done to minimise the potential for public liability claims. Accordingly, Mr Bell arranged for the vacant lot at the Premises to be fenced off. When this was done, a number of local residents became angry about the effect of the fence on the streetscape and the apparent blocking of some views. Others were irritated that they could not use the vacant land to picnic on. 33 On 20 September 2002 Mr Parker requested that JUA renew the Policy and add cover for burglary for contents and stock of $5000. Cover was confirmed by Mr Dardaneliotis on 23 September 2002 on such terms without a proposal being required (exhibit 1.64). 34 On 24 September 2002 a schedule of cover was sent to Mr Bell confirming the combined insurance cover for the new period of 26 September 2002 to 26 September 2003 (exhibit 1.66-67). 35 The building on the Premises was constructed of timber and fibro with a corrugated roof (see the photographs in exhibit A). 36 Mr Bells' evidence was that thieves were successful in breaking into the Premises on several occasions and stealing some items of property. 37 On 17 April 2002 the Premises were broken into and about $30 in cash and four boxes of confectionery worth about $40 were stolen. Mr Bell's evidence, which I accept, was that he reported the matter to the police and to Nadic Insurance Brokers. No claim was made under the Policy. 38 On 28 June 2002 a second break-in occurred. Thieves gained access to a storeroom and stole items belonging to the family such as skateboards, pushbikes and so on. Mr Bell told Mr Parker about the break in. No claim was made under the Policy. The items stolen were not covered by it. 39 On the night of 26 September 2002, thieves broke in again, this time entering the main building by smashing through the fibro cement sheeting wall of a toilet annex. A mini stereo system, CD player and various pieces of confectionery were stolen. Once again, Mr Bell reported the incident to Mr Parker and the local police. No claim was made under the Policy. Mr Bell replaced the damaged fibro cement with a solid timber panel to make it more secure and this thwarted a subsequent attempted break in. 40 In early 2003 Mr Bell's accountant advised him that because of the improvements that had been made to the building and the purchase of catering equipment that he should look into upgrading his insurance cover (T31.25). Mr Bell subsequently sought the advice of a builder who advised him that $350,000 would be a reasonable level of cover for the building component (T31.40). 41 Consequently, in about February 2003, Mr Bell contacted Mr Parker enquiring as to the cost of increasing the cover. It was not until June 2003 that Mr Bell formally sought an increase in the sums insured under the policy to $350,000 for the building and $125,000 for contents. In this regard, I am satisfied that the explanation for the delay between February and June 2003 was that Mr Bell simply did not get around to it. JUA agreed to these increases and an additional premium was paid for the balance of the policy period. 42 In the meantime, on 14 June 2003, some promotional chairs provided by Coca Cola and located on the veranda of the Premises were stolen and set on fire. There was no break-in at the Premises and no claim was made under the policy (T83-84), although the police were notified. 43 On 29 June 2003 an alarm at the Premises was activated. Mr Bell investigated and discovered that the rear screen door had been tampered with. As no entry had been gained, no claim was made, although police were notified. 44 In July 2003 Mr Bell became aware that some of the electrical items used at the Premises were not working properly. He spoke to an electrician, Geoff Inskip. On 17 July 2003 Mr Inskip found that some of the sub-floor electrical wiring had been burnt out. He also found a small number of burnt and unlit fire starters under the sub floor bearers. This incident was reported to Mr Parker and the local police. No claim was made under the Policy as the damage was minimal. 45 The fire occurred at the Premises on 7 August 2003. 46 As mentioned earlier, the Premises were heritage listed by Sutherland Shire Council and Innovative Designs had been retained by the plaintiffs as heritage consultants to assist in the preparation of a development application. At the time of the fire, the development application had not been lodged with the local council because the heritage consultants were still working on matters which had concerned the council, namely, wheelchair access and off-street deliveries. In this regard, the development application included a proposed development of five residential apartments above four commercial shops on the vacant block at the Premises. 47 On the day of the fire Mr Bell notified Mr Parker, who in turn notified the defendants. The defendants then commenced the claim process of assessment and investigation which included numerous interviews of Mr Bell by insurance representative including loss adjusters. He was also interviewed by the police. 48 The plaintiffs' claims under the Policy were eventually rejected. It was not done so expressly, but it became obvious to the plaintiffs that this was the case by the end of 2003. 49 As a consequence of the rejection of their claims, the plaintiffs were not able to proceed with the development of the site. They could not obtain any further finance from the ANZ Bank because the Business was no longer a going concern. In the result, the plaintiffs had no choice but to sell the Premises. After two sales fell through, the Premises was sold in June 2005 to Mars Consolidated Pty Limited for $3,100,000 with settlement deferred for 12 months. 50 The Policy provides as follows: "COVER We will pay up to the sum insured in accordance with the Basis of Settlement for Property that is Damaged at the Premises during the Period of Insurance. BASIS OF SETTLEMENT When the Property is Damaged during the period of insurance, the following basis of settlement will apply at each Premises: 1. (a) BUSINESS RECORDS "for Damage to business books, plan, computer printouts, and other business records. We will pay the cost of recreating the documents that are Damaged; and (b) ALL OTHER PROPERTY THAT IS DAMAGED "FOR ALL OTHER Property that is Damaged, we will pay the cost of Reinstatement." 2. REBUILDING AT ANOTHER LOCATION "Following Damage to a Building that is insured by this Section, you have the option of rebuilding at the location where the Damage happened or at any other location in Australia. Provided that: (a) We will not pay more than the cost that would have been incurred if Reinstatement of the Building that is Damaged had taken place at the location where the Damage happened; and (b) If the actual costs of rebuilding is less than the cost of Reinstatement at the location where the Damage happened then our payment is limited to the actual cost of rebuilding. LIMITATIONS OF COVER 1. … 2. SUM INSURED For a specific Category of Property we will only pay up to the Sum Insured in the Schedule for that Category of Property. 3. … 4. CASH SETTLEMENT If you request a cash settlement or if Reinstatement is not carried out we will only pay the lesser of: (a) an amount calculated by applying the Depreciation Factor to the cost of Reinstatement or (b) the Pre-Damage Value less the Damaged Value." 51 On page 18 of the Policy Clause 7 relating to "Non-Disclosure and Misrepresentation" is in the following terms: "If you make a misrepresentation to us or if you do not comply with your Duty of Disclosure and we issue your policy with terms and conditions that are different to the terms and conditions that would have been issued had there not been any misrepresentation and your Duty of Disclosure had been complied with, then: (a) The cover provided will be reduced so that we are placed in the same position that we would have been had there not been any misrepresentation and your Duty of Disclosure had been complied with; (b) We may also cancel your policy; (c) We may avoid your policy if the misrepresentation or your non-compliance with your Duty of Disclosure is fraudulent." 52 The Policy contains a number of relevant definitions including: "DAMAGE OR DAMAGED Damage means physical damage, destruction or loss. Damaged has a corresponding meaning to Damage. DAMAGED VALUE Damaged Value means the value of the Property that is Damaged after the Damage. This value must take account of the Pre-Damage Value and any real reduction in value of the Property following the Damage. EXCLUDED PROPERTY Excluded Property means the following items unless they are shown in the Schedule as being covered; 1. … 9. Standing timber, growing crops, plants, land including top soil and fill, landscaping, gardens and pastures. INDEMNITY VALUE Indemnity Value means the value of the insured Property at the date of loss: (a) taking into account the depreciation due to age, maintenance, condition, deterioration and wear and tear; and (b) Excluding the additional cost of complying with any: (i) Act of Parliament or regulation made thereunder; and/or (ii) Any by-law or regulation of any Municipal or other statutory authority, which was enacted, effected and/or introduced subsequent to the construction and/or manufacture of the Damaged Property. Indemnity has a corresponding meaning to Indemnity Value. PRE-DAMAGE VALUE Pre-Damage Value means the value of the Property that is Damaged immediately before the Damage. This value must take account of wear and tear, maintenance, construction, general condition and the anticipated future useful life of the Property. PROPERTY Property means any tangible property both real or personal of every kind and description belonging to you or that you are responsible for. Provided that this does not include: 1. personal property of directors, partners and employees that is not on the premises; and 2. items defined as Excluded Property. REINSTATEMENT Reinstatement means to restore that part of the Property that is Damaged so that the function, out put and construction are similar to that part of the Property, when it was new, by repairing it or at our option replacing that part of the Property with similar new property." 53 In their rejection of the plaintiffs' claims, the defendants rely on non-disclosure by the plaintiffs (paragraph 8(r) of the defence). In that regard the defendants rely on Mr Bell's evidence as to his understanding of the matters contained in the Proposal forms which he read and his understanding of the declarations that he made. The defendants also contend that the plaintiffs have suffered no loss or damage as a consequence of the fire. 54 As a preliminary contention, the plaintiffs put in issue, at the start of the trial, the allegation that the defendants had not complied with their obligations under s 22 of the Act. 55 In this respect, before they can rely on a material non-disclosure defence, the defendants must prove that before the Agreement was entered into the plaintiffs had been clearly informed in writing of the general nature and effect of their duty of disclosure. 56 The Court accepts Mr Bell's evidence, in particular, that he read the Proposal at exhibit 1.49-51 before he completed and signed it and, importantly, he read the details in it under the headings "Important Matters Referred to in the Insurance Contract Act", "Duty of Disclosure", "Non-Disclosure" and "Declaration" (T45 and 46). 57 As between the defendants and Red Gecko, completion of the proposal and the declaration by Mr Bell on behalf of Red Gecko was a necessary condition precedent which had to be satisfied before an agreement to insure for the period 26 September 2001 – 26 September 2002 came into existence. Having accepted Mr Bell's evidence, the Court is therefore satisfied that, as between the defendants and Red Gecko, s 21 of the Act was complied with on or about 9 January 2002. 58 The effect of the addition of Ferryboat as an insured under the Policy on 21 May 2002 was that the agreement to insure for the period 26 September 2001 – 26 September 2002 had been novated so that the parties to it were then Red Gecko, Ferryboat and the defendants. The period of the cover under the Policy was from 21/5/02 to 26/9/02. In this respect, it was Mr Bell who arranged the insurance on behalf of both plaintiffs through Mr Parker of Nadic Insurance Brokers. As at 21 May 2002, Mr Bell had already read and understood the defendants' requirements in relation to non-disclosure. It therefore follows that the defendants had complied with their obligations under s 22 of the Act as far as Ferryboat was concerned as well. 59 I now turn to consider whether the plaintiffs failed to comply with their obligations under s 21 (1) of the Act which provides: "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. 60 Section 21 is contained in Part IV of the Act. This provides an exclusive statutory code of remedies for non-disclosure and misrepresentation which has replaced the common law: Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606 at 615. 61 An insured has a duty to disclose relevant matters before a contract of insurance is entered into and up to the time that the contract of insurance is entered into: Prime Forme Cutting Pty Limited v Valtica General Insurance Co. Limited (1991) 6 ANZ Ins Cas 61-028. Further, s 11(9) of the Act provides that the entering into of a contract of insurance (other than life insurance) includes a renewal, extension or variation of the contract. 62 For there to be a duty of disclosure of a matter it must be known to the insured. In this context what is "known" is something different from suspicion or belief: Permanent Trustee Australia Co Limited v FAI General Insurance Co Limited (1998) 10 ANZ Ins Cas 61-408. 63 In CGU Insurance Limited v Porthouse (2008) HCA 30 (30 July 2008), the High Court stated at paras 52-53: "The statutory test for disclosure now to be found in s 21 of the Insurance Contracts Act focuses on the "reasonable insured", not the "prudent insurer", and operates, first, by reference to the actual knowledge of the insured (s 21(1)(a) and secondly, by reference to what "a reasonable person in the circumstances could be expected to know" (s 21(1)(b)). That latter statutory phrase has been interpreted as meaning that one should take into account only factors which are "extrinsic" to the insured, such as the circumstances in which the policy was entered into, rather than "intrinsic" factors such as the individual idiosyncrasies of the insured (27). Whilst it is possible to take into account the circumstances of the insured, the ultimate question under s 21(1)(b) turns on consideration of a reasonable person's state of mind, not the insured's state of mind (28). A test of disclosure, which operates by reference to both the insured's actual knowledge and the knowledge of a reasonable person in the same circumstances, is calculated to balance the insured's duty to disclose and the insurer's right to information. The insurer is protected against claims where the insured's disclosure is inadequate because the insured is unreasonable, idiosyncratic or obtuse and the insured is protected from exclusion from cover, provided he or she does not fall below the standard of a reasonable person in the same position." 64 In terms of the alleged non-disclosures by the plaintiffs, the defendants relied on the evidence of Mr Dardaneliotis. He gave his evidence in chief in his affidavit of 20 April 2007. In paragraph 24 he said: "I have been informed that prior to the Fire: (a) on more than one occasion the Premises had been broken into resulting in damage to the Premises and items being stolen and at least some of those incidents had been reported to the police; (b) Mr Bell had received correspondence threatening to boycott his business; (c) The Premises were the subject of a heritage protection order; (d) The Plaintiffs were in negotiations with Sutherland Shire Council to develop the Premises; (e) The Plaintiff were operating at a financial loss." 65 Mr Dardaneliotis went on to say in paragraphs 25-35 that he was unaware of these matters until after the fire. He also said that had he known about the break-ins it would have caused him serious concern and he would have spoken to Mr Parker and asked questions. In certain circumstances he said (paragraphs 27, 29 & 31) he may have offered to insure the Premises but at a higher premium and excess. In other circumstances he said (paragraphs 28, 30 & 33) he would have declined to offer or renew insurance. Then, in paragraph 37 he made the wide sweeping statement that: "If I had been informed of the matters set out in paragraph 24 above at renewal in September 2002 or at inception in September 2001 I would not have offered to insure Red Gecko and Ferryboat on any terms." 66 I will return to Mr Dardaneliotis' evidence shortly. 67 On the question of the plaintiffs' actual knowledge, leaving aside for one moment the matter of the break-ins, I accept Mr Bell's evidence in cross-examination that he did not know the matters set out in paragraph 24 (b) – (e) were relevant to the defendants' decision whether or not to accept the risk. Mr Bell impressed me as a truthful witness. He gave his evidence in a straightforward, careful manner and I have no reason to doubt it. In this respect, it was not even suggested to Mr Bell that he knew that the issue about whether the plaintiffs were operating at a profit or a loss was a relevant matter from the defendants' point of view. 68 It is therefore necessary for the defendants to establish, in respect of the matters in paragraph 24 (b) – (e) of Mr Dardaneliotis' affidavit, that a reasonable person in the circumstances would have been expected to know such matters were relevant to the defendants' decision to accept the risk. 69 The question as to whether a reasonable person in the circumstances could be expected to know that matters (b)-(e) were material is a matter of fact to be determined by the Court: Prime Forme Cutting Pty Limited v Baltica General Insurance Co. Limited (1991) 6 ANZ InsCas 61-028. 70 The onus is on the defendants to establish that a reasonable person in Mr Bell's shoes could have been expected to know of the materiality of the above matters. In this respect, the defendants merely relied on Mr Dardaneliotis' statements that the matters were material. Mr Dardaneliotis was an unsatisfactory witness who did not adequately elaborate on the basis of the reasons he gave for asserting the materiality of matters (b) - (e). 71 The evidence of Mr Parker is of more assistance to the Court in its determination of this matter. Mr Parker is a very experienced insurance broker who has worked in the insurance industry since 1981. One of his specialities is arranging insurance for cafes and restaurants. At the relevant time Mr Parker said he had organised insurance for approximately 500 restaurant and café businesses all of which were insured with JUA. Moreover, Mr Parker dealt with Mr Dardaneliotis on a daily basis and, particularly, was very familiar with the sort of matters that Mr Dardaneliotis was interested in having drawn to his attention when agreeing on behalf of underwriters to grant, extend it or renew cover. 72 In this context, Mr Parker's evidence at T184.1 was that he did not consider the heritage order was material from the underwriters' point of view. He also said at T184.20 that the possibility of an insured's property being developed was not material unless, obviously, something like a demolition or alteration process was about to begin at the property. Likewise, Mr Parker said he did not consider that threats by patrons not to continue to give their patronage to a restaurant would be material from an underwriter's point of view in circumstances of similar insurance to that of the plaintiffs'. Further, Mr Dardaneliotis never informed Mr Parker that whether or not a particular restaurant was operating at a financial loss was of material concern to Mr Dardaneliotis. Mr Parker took it that it was not (T 182). 73 When Mr Dardaneliotis was pressed in cross-examination about the materiality of the threatened boycott of the Premises by patrons, issues of disclosure of financial loss, the fact of the heritage order and the discussions that the plaintiffs were having about redevelopment of the Premises, he conceded that none of these matters, in isolation, was material (T153.25, T153.35, T155.40, T156.40 and T167.40). 74 For the reasons given below, I do not accept Mr Dardaneliotis' evidence that, even when taken together, matters (b) – (e) were material from the defendants' point of view. His evidence in this respect was entirely unconvincing. Accordingly, the defendants have failed to make out the materiality of matters (b)-(e). 75 That leaves the issue of the break-ins. 76 The evidence establishes that when the defendants approved the renewal of the Policy on 23 September 2002 two of the break-ins had occurred. In the first incident on 17 April 2002 only the small amount of cash (about $30) and confectionery (about $40 worth) was stolen. The second incident on 28 June 2002 concerned the theft of the bicycle and skateboards. Both incidents were reported to the police. Mr Bell also reported the second matter to Mr Parker. Mr Bell's evidence in this respect was that he did not think it was of any great importance in the overall scheme of things. Although he had an intention of making a claim under the Policy, it was not pursued because the Policy did not respond to such a claim. 77 The third break-in occurred on 26 September 2002 after the Policy had been renewed. It again involved a minor theft of a CD player, mini stereo and some confectionery. I accept Mr Bell's evidence that he reported the matter to Mr Parker. To the extent his evidence differed from Mr Parker's, in any respect, I prefer Mr Bell's account simply because I think he had a better recall of events than Mr Parker did. In any event, I am also satisfied that Mr Bell did not consider this particular event was of any importance in the overall scheme of things. 78 The final incident occurred on 14 June 2003, a month or so before cover was increased for buildings and contents under the Policy. This incident was really a very trivial affair involving the theft of the six outdoor plastic chairs provided by Coca Cola. Again, I accept Mr Bell's evidence that he did not regard this as important. 79 I am therefore satisfied from Mr Bell's evidence that he did not consider the so-called break-in incidents were material from the defendants' point of view. 80 In considering whether or not a reasonable person in the circumstances could be expected to know that the break-ins were material from the defendants' point of view it is helpful to consider the evidence of Mr Parker. First of all, Mr Parker said he considered the incidents as being of little importance. He also said that Mr Dardaneliotis was only interested in hearing about incidents where a claim was going to be made under the Policy (T178.40; T179.30). Based on the practice which had been developed between him and Mr Dardaneliotis, Mr Parker said he did not think that it was necessary to disclose break-ins to Mr Dardaneliotis. At T 180.28 his evidence was: "Q. No and so far as you were concerned – I mean in a way – in a sense you were – because you were the one who had the relationship with the insured's, you were – in a way you were his eyes and ears, weren't you? A. Correct. Q. And you were passing back to him what you – (a) what you considered was or might be relevant to what he needed to know? A. Correct. Q. Right and to your observations not only what you thought he needed to know but in fact the way he was dealing with the underwriting of the clients that you had with him? A. Correct." 81 Even when it came to something which might be material, Mr Parker said he would not notify Mr Dardaneliotis about it if he knew Mr Dardaneliotis did not want to know about it. In particular, his evidence at T 182.42 was: "Q. You wouldn't notify them because you didn't consider that that was something that Mr Dardaneliotis wanted to know about. Right? A. Correct. Q. And you were his eyes and ears effectively weren't you? A. Yes. Q. He wasn't dealing with the likes of Mr Bell or any of the principals of these businesses was he? A. No." 82 I accept Mr Parker's evidence about the above matters. He gave his evidence in a straightforward way and my assessment was that he did so truthfully as well. 83 On the other hand, I was not impressed by Mr Dardaneliotis when he gave his evidence because I do not consider that he was genuine when he told the Court that he would not have provided cover in the various scenarios that were put to him. Because Mr Dardaneliotis was no longer in the employ of JUA, there was no reason why he could not have given his evidence in a truly disinterested way. However, Mr Dardaneliotis chose not to do that; rather he sought to advocate the cause and defence of JUA and the remaining defendants. In my opinion, this was partly brought about because he was told from the outset, when asked to give affidavit evidence for the defendants, that the defendants had a non-disclosure case (T167.30). In my assessment, this clouded Mr Dardaneliotis' evidence from the beginning. Once told about this, Mr Dardaneliotis went about doing what he could to make good the defendants' case. This approach, in my opinion, was also affected by the fact, of which he was well aware, that he had made the decision to underwrite the risk, and so his pride was at stake. 84 In rejecting Mr Dardaneliotis' evidence for the above reasons I have taken into account his evidence about specific matters. For example, his evidence about needing to know about a potential redevelopment (T 154.35) did not make sense. His argument that the theft of money was indicative of arson (T164) made no sense either, other than to illustrate his partisan approach. As well, although he claimed to have refused cover in other situations where break-ins had occurred, there were no documents proffered to support this (T165.10) in spite of a request for discovery of such documents by the plaintiffs. To the extent that he sought to establish a practice on the part of JUA on these matters, Mr Dardaneliotis' evidence was in tatters as no documents were produced by the defendants to support such an assertion. The Court infers there were no firm practices or solid guidelines in place to assist underwriters in their determination of such matters. 85 Mr Dardaneliotis was prepared to go on risk knowing nothing more than the name and address of Red Gecko. When Mr Bell's signed proposal on behalf of Red Gecko came in it did not tell him a great deal more. Moreover, he did not even bother to get a proposal from Ferryboat. The reality was that Mr Dardaneliotis' file was one of hundreds he was handling and he only ever spent less than five minutes on it (T145.10). Mr Dardaneliotis accepted that the risk insured was "small beer" for him (T144.40) and not something that was on his radar. In other words, Mr Dardaneliotis and consequently all the defendants took a very relaxed approach to the whole thing. They were happy to get the business without bothering to find out much about it, let alone keep themselves informed along the way. 86 With regard to the so-called break-ins, I consider the circumstances of each of them were relatively trivial. Moreover, having regard to my acceptance of Mr Parker's evidence and my rejection of the evidence of Mr Dardaneliotis, I am of the opinion that the state of mind of a reasonable person in the place of Mr Bell would have been such that such person would not have considered those events to be material as far as the defendants were concerned. A reasonable person in such circumstances would therefore not have reported or disclosed those events to the defendants. 87 The defendants therefore fail in their defence of material non-disclosure. 88 That leaves for determination the defendants' contention that the plaintiffs have suffered no loss. The defendants' submissions on the law in this regard are set out in paragraphs 127-133 of counsel's written submissions dated 18 August 2008. Put simply, the defendants contend, based on the valuation evidence of Mr Phippen, that the plaintiffs suffered no loss because the Premises were worth $1.9 million immediately before the fire but increased in value immediately after and as a result of the fire to $2.8 million. 89 The plaintiffs on the other hand say that they are entitled to rely on the reinstatement clause in the Policy. It is located in the Policy under the heading "Basis of Settlement" and is contained in Clause 1(b) which is set out in paragraph 50 of this judgment. Further, the plaintiffs submit that the defendants cannot rely on Clause 4, Cash Settlement provisions in the Policy, under the heading "Limitations of Cover" because the plaintiffs were prevented from carrying out reinstatement at the premises by virtue of the very failure of the defendants to comply with their contractual obligations in the first place. To this end, the Court was referred to a statement in MacGillivray and Parkington on Insurance Law 10th ed para 19-21 where the learned author propounds that reinstatement only need be carried out where the insurers accept that reinstatement is the appropriate measure of indemnity. Counsel for the plaintiffs submitted that the Court should accept this proposition. I accept the submission. First, because I accept Mr Bell's evidence that the plaintiffs were committed to the proposed redevelopment of the premises that I have referred to earlier and that they only sold the premises because they did not have sufficient funds to reinstate the premises. Secondly, the defendants' failure to comply with their contractual obligations to accept the claim effectively operated as a repudiation of the Agreement, which in my opinion entitles the plaintiffs to claim damages on a reinstatement basis. 90 I should also add that although the defendants relied on the decision of the Court of Appeal in Bakerland Pty Ltd v Coleridge (2002) NSW CA 30, I do not regard that decision as applicable to the facts of this case. As will be seen from the judgment of Giles JA at 25, in the insurance policy in Bakerland, the "indemnity value" provisions distinguished the insurance from payment of an agreed sum or the provision of reinstatement. 91 In any event, the Court is not satisfied that the defendants have discharged the onus in establishing that the Premises were worth more immediately after the fire than just before it occurred. The defendants do not dispute in this regard that if they do not succeed on this point, that the plaintiffs are entitled to the amounts claimed by way of reinstatement. 92 The defendants relied on the joint report of Messrs Phippen & Hayden (exhibit 5) to establish that the market value of the Premises prior to the fire was $1.9 million, but afterwards it was $2.8 million: see paragraphs 1.3.1, 7.4.1 and 7.4.2 of their report. 93 On the face of it, the valuers' methodology in preparing their valuation involved: (a) Valuing the Premises at the pre-fire value based upon the improved property; and (b) Valuing the Premises at the post-fire value based upon it being vacant land with development potential. 94 The development potential relied upon was that set out in the report of Willana Associates, the author of which was Mr Harding (exhibit 3). 95 Mr Harding conceded he was wrong about the zoning of the land before the fire occurred (T 194.10) and that he was wrong about the relevant FSR (T 202) because it was actually more favourable in the zoning before the fire than afterwards. Moreover, in preparing his report, Mr Harding assumed the correct approach was to look at the desired use of the land in terms of maximising the permitted residential use and comparing it with a hypothetical development scenario before and after the fire. I accept the plaintiffs' submission that this approach was flawed because it failed to properly consider, in fact, the highest and best use of the land before the fire, such as for example, by reference to what Mr Bell was proposing. The approach was further flawed because Mr Harding used an after the fire scenario which overstated the development potential of the land. I accept the plaintiffs' submission that this created a manifestly misleading assessment as to the difference between the two and that in reality the planning controls were more flexible before the fire, the site was the same size and the only difference was the café (T204.50 – 205.30). The café could have itself become part of a successful and viable development, a possibility which Mr Harding accepted in cross-examination: T 206.5. 96 I am also satisfied that Mr Harding's opinion as to what may have been an approvable development after the fire was incorrect in material respects, but especially because the very development application was challenged and approval was only given for 8 units as opposed to 10: T 200.1. Moreover, Mr Harding had not seen any plan of the hypothetical development before the fire, nor, more particularly, any plan of they hypothetical development after the fire, so as to properly consider which of the units would have had water views. 97 In all the circumstances, I reject Mr Harding's report because it was not proffered to the Court on a disinterested basis and purported to advocate the defendants' cause. 98 As far as the valuers were concerned, Mr Phippen accepted in cross-examination that an important assumption in the valuers' valuation had been that the development application referred to in Mr Harding's report as the "after" scenario was going to be approved. In this respect Mr Phippen acknowledged that if such an application was not going to be approved then the valuation would need to be reconsidered (T 233.5). This concession alone infects the valuation. 99 In any event, I do not accept the valuation made by Messrs Phippen & Hayden because of the evidence which emerged during Mr Phippen's cross-examination. 100 First of all, Mr Phippen relied to a large extent upon anecdotal evidence from two local agents, although he did not speak to them before preparing the report. Importantly, one of these agents reported to the defendants' private investigator that an offer had been made on the property for $2.1 million before the fire (exhibit G 117). This information was not conveyed to Mr Phippen, but, importantly, he did not even find out about it by his own enquiries. I was not impressed when Mr Phippen sought to stick to his opinion notwithstanding the existence of this letter. Next, for the purpose of comparable apartment values, Mr Phippen referred to one which was not in Bundeena. And this property had been sold three years before the date of valuation (T 216.46). The only other comparables which were used were two brick veneer freestanding homes in Bundeena (T 218). 101 In calculating a rental return for the Premises before the fire, Mr Phippen relied on an inspection which he had carried out some four years beforehand in connection with another entirely unrelated case. Mr Phippen conceded in cross-examination he had in fact no idea whether the Premises had changed in any way since the initial inspection and he assumed that the rental which was being paid was the same as that in 1999 (T 225). Mr Phippen had not considered what a reasonable lessee may have been prepared to pay to lease the restaurant in the condition it was in before the fire. This was important for him to consider because the plaintiffs had made the improvements referred to earlier in this judgment (T 229). 102 I was unconvinced by Mr Phippen in his evidence when he sought to maintain the figure for the "before" valuation, particularly bearing in mind the offers made before the fire which were well in excess of his valuation plus the fact that the property next door, only two-thirds the size of the Premises, had been sold for $2.1 million. In addition, although describing the position of the café as a prime one, Mr Phippen paid no regard to that fact in assessing what a reasonable restaurateur may have been prepared to pay to lease the café in the condition it was in before the fire. As well, Mr Phippen failed to consider that a purchaser might prefer to keep the café because such a person may not have wished to rebuild that particular part of the site, the cost of which would have been at least $500,000 (T 229). Finally, Mr Phippen conceded there was no basis for his assumption that all of the "after" units would have water views but not all of those "before" (T 234; T235 & T 244). 103 Having regard to the above matters and Mr Phippen's unwillingness in the witness box to make reasonable concessions, particularly as to the relevance of the offers which had been made for Premises that he was valuing (T 214-215; T 219-220; T 222-224) and his general reluctance to revisit the actual valuation when given more up to date information (T 253-254), I reject Mr Phippen's evidence and the valuers' report. 104 It was faintly argued by the defendants that the plaintiffs could not recover the cost of reinstatement because the building on the Premises was "Excluded Property" as defined under the Policy because it was "land". I reject the submission because, in the context of the definition of Excluded Property, it is clear that "land" does not include buildings. 105 In the result, the plaintiffs are therefore entitled to recover for the amounts that they have claimed. 106 Although the defendants submitted that there should be no judgment entered against JUA because it was simply the agent of the 2nd – 6th defendants, the evidence makes it abundantly clear that, at all material times, JUA was the agent of undisclosed principals. Therefore, the plaintiffs are entitled to succeed against JUA. 107 At the conclusion of submissions, Mr Gyles handed up a schedule of the plaintiffs' claims which included interest calculated in accordance with s 57 of the Act. Mr Gooley informed the Court that the amounts set out in the schedule were agreed. 108 As the interest calculations were made up until 25 August 2008, additional interest at the daily rate of $70.09 multiplied by 28 days should be awarded to Ferryboat in the amount of $1,962.52. 109 In the case of Red Gecko, interest at the daily rate of $30.99 multiplied by 28 days should be awarded in the amount of $867.72. 110 In the result, there will be a Verdict and Judgment in favour of Ferryboat Pty Limited against the Defendants in the amount of $413,411.43. There will also be a Verdict and Judgment in favour of Red Gecko Pty Limited against the Defendants in the amount of $182,782.73. 111 I direct that the exhibits be returned. 112 Costs should follow the event on the usual basis, but I will hear argument if either of the parties wishes to contend otherwise. ********** 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.