Claim Failures, Disputes and Official Sources
Non-disclosure and business insurance claims: section 21 and section 28 explained
What Australian businesses must disclose to insurers under section 21 of the Insurance Contracts Act, how section 28 remedies reduce claims, worked examples and how to fix a gap.
When you take out or renew a business policy in Australia, you must tell the insurer every matter you know, or that a reasonable person in your circumstances would know, is relevant to its decision to insure you and on what terms (section 21 of the Insurance Contracts Act 1984). If you fail to do so and the failure is not fraudulent, the insurer cannot simply cancel the policy after a claim; under section 28 it can reduce its liability to the amount that puts it in the position it would have been in had you disclosed. If it would not have insured you at all, that can mean nothing is paid. If the failure was fraudulent, the insurer may avoid the policy entirely. The fix is simple: disclose fully, and if you realise something was missed, tell the insurer now.
This guide is part of the liability claim mistakes overview. Examples are illustrative.
What the duty covers
The test has two limbs:
- What you know is relevant. Matters you actually know would affect the insurer's decision.
- What a reasonable person would know is relevant. Matters a reasonable person in your circumstances could be expected to know are relevant, even if you did not think about it.
The duty applies before the policy is first entered into, and again before it is renewed, extended, varied or reinstated. You do not need to disclose matters that reduce the risk, that are common knowledge, that the insurer knows or should know in the ordinary course of its business, or that the insurer has waived, for example by not asking about them in a detailed proposal.
The insurer must clearly tell you about the duty in writing before the contract is entered into (section 22).
Why business policies are different from home and car
Since 5 October 2021, policies obtained wholly or predominantly for personal, domestic or household purposes are "consumer insurance contracts", where the duty of disclosure has been replaced by a duty to take reasonable care not to make a misrepresentation. Business liability policies are generally not consumer contracts, so the wider section 21 duty still applies, including for sole traders.
Matters businesses often fail to disclose
| Matter | Why it is relevant |
|---|---|
| New activities, products or services | Changes the type of risk; may be outside the insurer's appetite |
| Work at heights, hot works, underground or demolition work | Higher-severity claims |
| Work interstate or overseas, or exports to the USA or Canada | Different legal environment and claim costs |
| Past claims, incidents and letters of demand | Indicates future claims |
| Previous insurer declined, cancelled or imposed terms | Signals higher risk |
| Criminal convictions of directors or the business | Moral hazard |
| Insolvency history | Financial and moral hazard |
| Use of uninsured subcontractors | Adds risk to your policy |
| Significant contracts with wide indemnities | Contractual liability exposure |
How section 28 works, with examples
Example 1: higher premium. An illustrative cafe renews without disclosing that it now runs weekend functions with a bar. A guest is injured on the dance floor, and a $60,000 claim is made. The insurer shows that, had it known, it would have charged $2,400 instead of $1,800. One approach courts and AFCA have taken is a proportional reduction: $1,800 / $2,400 = 75%, so the insurer pays $45,000 and the cafe bears $15,000. The actual approach depends on the evidence of what the insurer would have done.
Example 2: different terms. A plumber does not disclose that they started gas fitting. The insurer shows it would have insured them, but with a gas work exclusion. A fire caused by gas fitting would then be treated as excluded, and the insurer's liability for that claim may be nil, while unrelated claims remain covered.
Example 3: would not have insured. A security company does not disclose crowd-control work, which the insurer does not accept. For a claim arising from crowd control, the insurer's liability may be reduced to nil, because it would never have offered cover.
Example 4: fraud. A business deliberately hides a series of serious past claims. The insurer may avoid the policy from the start, refunding the premium, and no claim is paid.
The insurer must prove its case
In disputes, the insurer generally has to show what it would have done if told: for example, its underwriting guidelines, rating tables or evidence of how it treated similar risks. It cannot simply assert that the information would have mattered. If an insurer relies on non-disclosure, ask for the evidence it relies on.
How to fix a gap before it becomes a claim
- Review the business description and proposal answers on your current schedule.
- List every activity, product and change since you last disclosed.
- Write to your insurer or broker with the new information. Keep a copy.
- Accept any additional premium or changed terms, or shop around if the insurer will not cover the new activity.
- At every renewal, answer the questions fresh rather than accepting "no change".
Use the quote preparation checklist to keep a record of what you disclosed.
When to get advice
If an insurer has reduced or refused a claim for non-disclosure, consider advice from a lawyer experienced in insurance or a broker. You can also use the insurer's complaints process and then AFCA if your business is eligible. For background on the Act, see the Insurance Contracts Act and business policies, and for the other main causes of disputes, common liability exclusions.
Frequently asked questions
If the insurer never asked, do I still need to disclose?
Possibly. The duty covers matters a reasonable person would know are relevant. However, if the insurer asked specific questions and not others, it may be treated as having waived disclosure of matters outside those questions. When in doubt, disclose.
Can the insurer cancel my policy for non-disclosure?
Section 60 allows cancellation for failure to comply with the duty of disclosure, with written notice. Cancellation operates for the future; claims are dealt with under section 28.
Does my broker's mistake count as my non-disclosure?
If you told your broker and the broker failed to pass it on, you may have a claim against the broker. Keep records of what you told them.
Does the duty apply mid-term?
Generally not between renewals, unless you vary the policy, but the policy may contain conditions requiring you to notify changes in risk. Read your policy.
Sources
- Federal Register of Legislation — Insurance Contracts Act 1984, sections 21, 22, 28 and 60
- ASIC — guidance on the 2021 disclosure reforms
- AFCA — published determinations about non-disclosure
- Treasury — background to the Financial Sector Reform legislation
