Introduction

Shortly before the New Year, the High Court provided welcome clarification of the scope and content of the duty of utmost good faith in the Insurance Contracts Act (ICA), finding it does not impose on an insurer a general duty (outside of the insurance contract) to act decently and fairly. In this case, the Court found the insurer had not breached the duty by resiling from a representation that it would not rely on an available defence under the ICA to reduce cover.

Background

Delor Vue Apartments CTS 39788 (Delor Vue) is the body corporate for an apartment complex in North Queensland (Buildings).

In March 2017, Allianz Australia Insurance Limited (Allianz) issued a policy of strata insurance to Delor Vue covering the risk of physical damage to the Buildings (Policy). Before the Policy was issued, Delor Vue knew that the Buildings suffered from construction defects in roof eaves and soffits, but critically did not disclose this to Allianz.

Five days after inception of the Policy, the Buildings were damaged by Tropical Cyclone Debbie. Delor Vue lodged a claim under the Policy seeking indemnity for the damage. Allianz quickly identified Delor Vue’s failure to disclose the known defects in the Buildings before the Policy was issued and advised it would investigate the issue further before providing a decision on coverage.

In May 2017, Allianz sent an email to Delor Vue granting cover for its claim which stated:

“Despite the non-disclosure issue which is present, [Allianz] is pleased to confirm that we will honour the claim and provide indemnity to [Delor Vue], in line with all other relevant policy terms, conditions and exclusions.”

The email went on to say that Allianz would arrange for the repair of damage “for those buildings which lost roof sheeting only”, but Delor Vue would otherwise be responsible for arranging and funding rectification of the defective parts of the roofs. The majority of the High Court noted the email was imprecise as to the scope and extent of the works which Allianz was agreeing to arrange.

Over the following year, the parties investigated the nature and cost of the required repair works. This process revealed additional latent defects in the roof trusses and tie-downs (which were excluded under the Policy). All rectification and repair works needed to be undertaken as a single project, and disputes arose between the parties as they attempted to agree on the sequence and precise scope of the works, and the costs for which each would be responsible.

In May 2018, Allianz communicated the following settlement proposal to Delor Vue:

• Despite Delor Vue’s non-disclosure, Allianz would pay for repairs to the Buildings only to the extent they were unrelated to the pre-existing defects. Allianz quantified these works at around $900,000;
• Delor Vue must otherwise arrange and pay for the rectification of pre-existing roof defects by September 2018 (quantified by Allianz at approximately $3.5 million); and
• If Delor Vue did not agree to the proposal within 21 days (later extended to three months), it would lapse and Allianz would proceed to reduce its liability to nil pursuant to s28(3) of the ICA on the basis Delor Vue’s failure to disclose the known defects in the Buildings was a breach of its duty of disclosure under s21 of the ICA, and but for that breach Allianz would never have issued the Policy.

Delor Vue rejected the proposal. It asserted that Allianz could no longer rely on s28(3) of the ICA on the basis its original grant of cover made an election to accept the claim and not raise the defence in s28(3), or alternatively amounted to a waiver of the defence.

Allianz subsequently confirmed the reduction of liability for Delor Vue’s claim to nil pursuant to s28(3).

Decisions at First Instance and on Appeal to the Full Federal Court

Delor Vue issued proceedings in the Federal Court challenging Allianz’s ability to rely on s28(3). Chief Justice Allsop gave judgment for Delor Vue, holding that Allianz was unable to rely on this defence for reasons of waiver, estoppel and breach of the duty of utmost good faith.

Allianz unsuccessfully appealed to the Full Court of the Federal Court. In dismissing the appeal, a majority of the Full Court held that Allianz had made an irrevocable election not to rely on the defence available under s28(3) of the ICA.

The Court at first instance otherwise made key factual findings which were not challenged on appeal to the Full Court or High Court, that (i) by not disclosing the pre-existing defects in the Buildings, Delor Vue had breached its duty of disclosure in the ICA; (ii) had the known defects been disclosed to Allianz, it would not have accepted the risk, and (iii) Allianz was entitled (subject to any waiver, estoppel or failure to act with the utmost good faith) to reduce its liability for the claim to nil by reason of the non-disclosure.

Appeal to the High Court

Allianz successfully appealed the Full Court’s judgment to the High Court.

By a 4-1 majority (Kiefel CJ, Edelman, Steward and Gleeson JJ), the High Court overturned the Full Court’s decision, finding that Allianz’s waiver was revocable (and had been successfully revoked), and that Delor Vue had not established any election, waiver, estoppel or breach of the duty of utmost good faith on the part of Allianz that operated to preclude it from revoking the waiver.

In dissent, Justice Gageler, in short, upheld all findings at first instance and on appeal to the Full Court (save that he considered there had been a waiver by Allianz of its rights to rely on the s28(3) defence, as opposed to an election).

The key features of the majority judgment are discussed in greater detail below.

Waiver and Election

The Court held that waiver of a contractual right is rarely irrevocable, and that absent a variation to a contract by way of entry into a deed or a fresh agreement for consideration, or the expiry of a limitation period, a promise not to enforce a legal right can be revoked at any time with reasonable notice to the other party.

Delor Vue submitted that Allianz’s representation not to rely on s 28(3) of the ICA constituted an irrevocable election between alternative and inconsistent rights. The Court found that there was no such election by Allianz on the basis s28(3) operates only as a defence to non-disclosure by an insured, and not as a condition precedent to the existence of a corresponding obligation by the insured. Nor does s28(3) give the insurer the power to elect to affirm or terminate the contract of insurance.

The Court then considered whether Allianz had extinguished its right to rely on the defence and recognised that such a situation may arise where a person abandons a right by completing the exercise of a legal power to extinguish it, or the full satisfaction of alternative and inconsistent rights (for example, a plaintiff making an election between inconsistent remedies such as compensatory damages over an account of profits). The Court held that Allianz’s May 2017 email granting cover in spite of Delor Vue’s non-disclosure, amounted to no more than taking steps that were inconsistent with an intention to rely on the defence in s28(3), and not full satisfaction of alternative rights. The majority held that Allianz had not extinguished its right to rely on the defence.

Estoppel

There was no dispute that Allianz had represented it would not raise the s28(3) defence, and that it later sought to withdraw from this position. The only contentious issue was whether Delor Vue had suffered any detriment in relying on the original representation.

The Court held that detriment is not limited to monetary loss but encompasses any adverse consequences or “a source of prejudice” (including loss of opportunity of real and substantial value). Delor Vue submitted that Allianz’s representation that it would not rely on the available non-disclosure defence caused detriment in the form of two lost opportunities; (i) loss of the opportunity to sue Allianz for indemnity in May 2017 and secure a better outcome; and (ii) loss of the opportunity to carry out repair works itself in 2017 rather than being the Buildings being left in a damaged state for more than a year, and avoiding the attendant inconvenience and distress.

The majority found there was insufficient evidence that Delor Vue had suffered either form of detriment. Importantly, the first alleged lost opportunity was never raised at trial, in which case there was no evidence available on which to infer that Delor Vue could have obtained a resolution of its claim which was superior to that offered by Allianz in May 2018. As to the other alleged lost opportunity to repair the Buildings in 2017, the majority found that Allianz’s conduct had not caused Delor Vue any detriment in the relevant sense (such as the repair works becoming more costly or difficult to undertake 12 months later, or causing Delor Vue to commit its available funds to other endeavours upon receipt of the original indemnity decision). In fact, the majority observed that Delor Vue’s available funds (including a $750,000 loan it was arranging) fell manifestly short of the several million dollars required to repair the Buildings.

The Court accordingly found that Allianz was not estopped from altering its position in May 2018. Critically, Delor Vue had not maintained a case that the repairs to the Buildings would have been less expensive or easier to undertake in May 2017 (rather than a year later when Allianz sought to rely on s28(3)). Had it been able to demonstrate this sort of detriment, the outcome may well have been different.

Utmost good faith

The duty of utmost good faith in s13 applies symmetrically to insurers and insureds and requires the parties to exercise contractual rights, powers and duties “consistently with commercial standards of decency and fairness”. The Court made clear that it does not impose duties on an insurer that are fiduciary in nature, and is not free-standing or independent from the insurance contract. The High Court considered that the Full Court erred in finding that Allianz was under a general duty to act decently and fairly towards its insured.

The High Court characterised Delor Vue’s submission that Allianz had breached this duty as requiring recognition of a novel duty on the part of Allianz “not to resile, without a reasonable basis, from any significant representations” concerning Delor Vue’s claim. The Court considered that accepting this submission would subsume the existing legal doctrines of election, waiver and estoppel into a broader positive duty not to unreasonably resile from significant representations on cover (and would sideline the requirements for reliance and detriment). The Court was not prepared to recognise such a novel duty in those circumstances.

In finding that Allianz had not breached its duty of utmost good faith, the High Court emphasised the fact that Delor Vue’s claim involved insured and uninsured losses, and Allianz’s May 2018 correspondence did not reverse the previous grant of indemnity, but rather added further content to it by seeking to clarify its terms (notwithstanding that it did reverse its position regarding s 28(3)). The Court found that Allianz’s conduct needed to be considered in its entirety and in context, and its change of position in relation to s28(3) could not be viewed in isolation to the rest of its conduct.

Implications

By refusing to recognise the duty of utmost good faith as free-standing or fiduciary, or as including a general prohibition on insurers resiling from significant representations regarding cover for insurance claims without a reasonable basis, the High Court has provided important guidance on the scope of the implied duty. The decision also affirms that doctrines of waiver, election and estoppel continue to play an important role in insurance contracts, and are not to be displaced by the duty of utmost good faith.

The decision should give insurers some confidence that when indicating a position on cover or negotiating to resolve claims, they will be permitted to change their position if there are good reasons to do so. However, it should be stressed that Delor Vue’s claim involved insured and uninsured components, and Allianz never sought to entirely withdraw its grant of indemnity. The outcome may have been different had cover been fully granted, and the insurer later sought to completely reverse its position.

Further information / assistance regarding the issues raised in this article is available from the author, Jonathan Sumskas, Partner or your usual contact at Moray & Agnew.