How underwriting guidelines saved an Australian insurer $250,000

The recent Queensland Court of Appeal decision of Michail v Australian Alliance Insurance Company Ltd [2014] QCA 138 reinforces that clear and consistent underwriting guidelines are essential for all insurance agencies.

In this case, Mr Michail had insured his Aston Martin for $250,000 with Australian Alliance Insurance Company Ltd’s (AAI) agent, Shannons. The vehicle was subsequently damaged and deemed a ‘total loss’ under the insurance policy.

When taking out the policy, Mr Michail failed to disclose relevant aspects of his traffic history. Shannons, relying on the underwriting guidelines, claimed that, if they had been made aware of Mr Michail’s undisclosed traffic history, they would not have entered into the policy.

The guidelines categorised matters as either ‘referable’ risks or ‘unacceptable’ risks. The guidelines stated that ‘where a risk is deemed to be ‘unacceptable’ it must be declined unless it is referred to a staff member with Regional Manager and above underwriting authority.’

Traffic history was generally classified as a ‘referable’ risk under the guidelines. However, as Mr Michail had additional ‘referable’ risks that he had disclosed, the undisclosed traffic history became an ‘unacceptable’ risk.

Mr Michail argued the equivocal wording of ‘unacceptable’ risk within the guidelines left the Regional Manager discretion to accept the application.

Counsel for Shannons argued that the apparent discretion only allowed ‘unacceptable’ risks where they did not directly impact the intended insured risk.

The Court of Appeal found that a discretion might have existed if the matters that resulted in the risk being deemed unacceptable under the guidelines would in fact not impact on the risk that was being proposed. However, this discretion was not enlivened in these circumstances as the risk arising from the undisclosed traffic history directly impacted upon the risk insured by the relevant policy.

AAI successfully outlined the reasons behind their underwriting guidelines and explained the relevant discretions to step outside of those guidelines and the reasons why the facts relating to Mr Michail’s proposal did not merit stepping outside of those guidelines. AAI were not required to pay Mr Michail under the policy and the appeal was dismissed.