Insurer’s Denial Upheld: Non-Disclosure of Material Risk Changes Reduces Liability to Nil

The Supreme Court of New South Wales, in Sphere Healthcare Pty Ltd v Allianz Australia Insurance Ltd [2025] NSWSC 606, has confirmed that an insurer was entitled to deny indemnity and reduce its liability to nil where the insured failed to disclose a fundamental change to its operations. The decision reinforces the breadth of an insurer’s entitlements under section 28 of the Insurance Contracts Act 1984 (Cth) (ICA) and provides clear judicial guidance on the limits of the waiver defence.

Background

Sphere Healthcare Pty Ltd (Sphere) operated a pharmaceutical manufacturing facility at Moorebank, New South Wales.

Its insurer, Allianz Australia Insurance Ltd (Allianz), had provided insurance to it since 2012 on the basis that the site was a pharmaceutical manufacturing risk with limited ethanol storage (approximately 4,000 litres) in a compliant external facility.

In late 2019, Sphere entered administration and was acquired by GMP Pharmaceuticals Pty Ltd (GMP), part of the Aunew Group. In early 2020, surging demand for hand sanitiser during COVID-19 led GMP to commence manufacturing at the Moorebank premises, requiring approximately 60,000 litres of ethanol for on-site storage. This was a fifteenfold increase.

Concurrently, Aunew sought insurance for Sphere. On 3 March 2020, Sphere’s broker submitted a placing slip to Allianz describing the business as “principally products & health foods contracted manufacturer & wholesaler”. Allianz asked whether there had been any changes to business activities. The broker confirmed there had been no change, and the policy of insurance incepted on 20 March 2020.

Critically, while policy discussions were ongoing, Sphere and GMP had already taken substantial steps toward hand sanitiser production, including product development, sourcing ethanol, and preparing the facility. Allianz was not informed.

A subsequent change in brokers led to a dispute about the policy’s status. The first broker instructed Allianz to cancel the original policy; the second broker then approached Allianz seeking to transfer the cover, resulting in a new policy schedule being issued. The question was whether the policy had been cancelled or merely varied.

Pursuant to its pivot to hand santiser production, Sphere stored approximately 60,000 litres of ethanol despite having safe capacity for only 4,000 litres. The excess was double-stacked in an area adjacent to the factory alongside cardboard pallets.

On 9 July 2020, a major fire destroyed the premises and its contents.

Sphere made a claim under the Allianz policy in relation to the fire. Allianz denied indemnity, relying on non-disclosure and breach of policy conditions.

Sphere commenced proceedings seeking indemnity under the policy.

Decision

The central issue was whether Allianz was entitled to decline the claim on the basis of Sphere’s non-disclosure under section 21 of the ICA, and to reduce its liability to nil under section 28.

Section 21 of the ICA provides that, prior to the formation of a contract of insurance, the insured must disclose to the insurer every matter known to them that is relevant to the insurer’s decision whether to accept the risk, or that a reasonable person in the circumstances would be expected to know is relevant to that decision. Section 28 permits an insurer, where the insured has failed to comply with its duty of disclosure, to reduce its liability to the amount that would place it in the position it would have been in had proper disclosure been made. Where the insurer would not have accepted the risk at all, liability may be reduced to nil.

On the threshold question of whether the policy had been cancelled or varied, the Court held that the 20 March 2020 policy remained on foot. The first broker lacked authority to cancel it, and the subsequent dealings with the second broker constituted a variation, resulting in a new contract on 31 March 2020. Sphere was therefore obliged to disclose material information up to that date.

Sphere argued that Allianz had waived the duty of disclosure by reason of their longstanding relationship, in which Allianz typically gathered information itself rather than requiring proposal forms. The Court rejected this. The broker’s confirmation of “no change in business activity” positively conveyed that the risk was unchanged and did not put Allianz on inquiry. A reasonably prudent underwriter is not required to investigate mere possibilities.

The Court found that Sphere had breached its duty of disclosure. By 31 March 2020, Sphere had progressed well beyond a concept; undertaking research, testing and facility modifications for ethanol-based production. A reasonable person in its position would have recognised that introducing bulk ethanol, exceeding safe storage capacity by a factor of fifteen, was material to Allianz’s assessment of risk.

The Court accepted that, had proper disclosure been made, Allianz would have declined the risk. It was entitled to reduce its liability to nil under section 28 of the ICA. There was no obligation to extend cover.

Implications

The decision is a vindication of insurers’ rights to rely on the duty of disclosure as a complete answer to claims where the insured has materially changed its risk profile without notification. Several practical points emerge for insurers.

• No obligation to investigate beyond what is presented

The Court confirmed that a reasonably prudent underwriter is not required to investigate “mere possibilities” or to make further inquiries where disclosure is vague or incomplete. Insurers can take comfort that a failure to ask follow-up questions will not, without more, amount to a waiver of the duty of disclosure. This is particularly important where brokers provide generic confirmations such as “no change in business activity”. The Court held that such statements positively convey that the risk is unchanged and do not put the insurer on inquiry.

• Reduction of liability to nil remains available

Where an insurer can demonstrate, on a counterfactual basis, that it would not have accepted the risk had proper disclosure been made, liability may be reduced to nil, even in the absence of fraud. Insurers should ensure that their underwriting files clearly document the basis on which risks are accepted and the information relied upon, as this evidence will be critical to establishing the counterfactual.

• Ongoing duty during policy variations and renewals

The Court’s finding that the duty of disclosure continued up to the point the varied contract was concluded (31 March 2020) is instructive. Insurers dealing with policy transfers, broker changes or mid-term variations should be aware that the duty of disclosure is refreshed at each point a new contract is formed or an existing contract is materially varied. This presents an opportunity to request updated disclosures whenever cover is restructured.

• Underwriting file records

The decision underscores the importance of maintaining clear contemporaneous records of the information provided at placement and any representations made by brokers. The Court closely examined the sequence of communications between the broker and insurer. Insurers should ensure that underwriting files record what was asked, what was disclosed and what was relied upon in accepting the risk, as this material forms the evidentiary foundation for any subsequent declinature or reduction of liability.

• Scrutinising broker confirmations at claims stage

When assessing claims, insurers should closely examine the adequacy of disclosure at placement, particularly where brokers have provided bare confirmations rather than substantive descriptions of the insured’s operations. Generic statements that business activities are “unchanged” may, as this decision demonstrates, mask material developments that fundamentally alter the risk profile. Insurers are well-placed to challenge such confirmations where the loss event reveals a risk that was plainly not within the scope of the cover as underwritten.