No lack of utmost good faith in insurer's change of heart

Allianz Insurance Limited v. Delor Vue Apartments CTS 39788 [2022] HCA 38

On 14 December 2022, the High Court of Australia issued the final word in this long-running saga, overturning the Plaintiff insured’s success at first instance and in the Full Federal Court.  The insurer was permitted to exercise its rights to rely upon the insured’s failure to disclose known defects to it prior to policy inception, notwithstanding its previous unreserved grant of indemnity for parts of the claim and that it did not breach its duty of utmost good faith when it made a “drop dead” offer to settle the insured’s claim, failing acceptance of which the non-disclosure point would be taken.

Facts:  The insured was the body corporate for a northern Queensland apartment building. It had a public liability and property damage insurance policy issued by Allianz Insurance Limited (Allianz). In 2017 the building was damaged by Tropical Cyclone Debbie. The Cyclone damage revealed pre-existing defects that had not been disclosed to Allianz although they were known to the insured. In the High Court, there was no dispute that the duty of disclosure had been breached and that Allianz would not have agreed to enter into the policy had the disclosures been made.

In May 2017, when it was already aware of the non-disclosure issues, Allianz agreed to indemnify for some of the repair costs but, denied indemnity for work relating to the pre-existing defects.  The communication also required the insured to cooperate with Allianz in its adjustment of the claim and potential recovery action.

Over the next 12 months, as Allianz’s investigations progressed, additional pre-existing defects were discovered and disputes arose between Allianz and the insured about the extent of the required work.

In May 2018 Allianz offered to pay for work with an estimated cost of almost $919,000 but said that if the offer was not accepted promptly, Allianz would reduce its liability to nil pursuant to s 28(3).  The uninsured work was then estimated at about $3.579 million.

At first instance, the primary Judge found that Allianz had waived its rights to raise a non-disclosure defence or was estopped from so doing and had failed to act with utmost good faith[1].  The Full Federal Court dismissed Allianz’s appeal by a majority judgment on the basis of an election (rather than waiver) by Allianz, but with one dissent[2].

Election and waiver

The majority in the High Court (Kiefel CJ, Edelman, Steward and Gleeson JJ) noted that “[b]y itself, a waiver of a right is rarely irrevocable”, revocation at any time being permissible with reasonable notice, absent exceptional circumstances (for instance, when the waiver is given in terms that are plainly inconsistent with a right to revoke). The insured can enforce a waiver even if it cannot point to the sort of detrimental reliance that would give rise to an estoppel, although the majority posited (but did not decide) that waiver will seldom occur where an estoppel would not also arise.

Allianz’s May 2017 communication was ambiguous about the extent to which it agreed to indemnify and it could not have been certain, then, of the extent of its entitlement to reduce its liability under s 28(3). Steps it took thereafter, such as asserting contractual rights of access to the property, to control the repair work and to bring subrogated recovery action were not inconsistent with a s 28(3) defence because Allianz did not then know whether that defence would fully extinguish its liability for the claim.

Estoppel

Further, the insured had not demonstrated its detrimental reliance on Allianz’s representation that the s 28(3) defence would not be raised. Although detriment is not restricted to loss that can be measured in monetary terms, there must be adverse consequences, or “a source of prejudice”[3] or the loss of an opportunity of real and substantial value[4].

The insured relied upon lost opportunities to:

• challenge Allianz’s position in May 2017 and possibly resolve the issue on terms more favourable than Allianz’s May 2018 offer. However, that was not the case pursued at first instance and there was no evidentiary basis for an inference that a better resolution was available, or
• take early steps to repair the damage rather than being left with an unrepaired property for more than a year.  However, there was no allegation or evidence that the funds that might have been committed to repair costs were instead used elsewhere or that the work had become more costly with the passing of time.  Indeed, the insured did not have the funds to pay for all of the work.

Duty of utmost good faith

The duty set out in s 13(1) of the Insurance Contracts Act casts symmetrical obligations on both the insured and the insurer, but the obligation cast on the insurer is not fiduciary and does not require it to disregard its own interests. It requires that powers be exercised and duties performed “consistently with commercial standards of decency and fairness”[5], not those standards more generally.

Thus, a party may breach its duty of utmost good faith if it refuses to cooperate with another contractual party’s exercise of a power[6] and an insurer may do so if it fails to accept or refuse a claim within a reasonable period[7]. The Full Court was in error when it decided that the content of the duty of utmost good faith was “an evaluative decision to be made by reference to all of the circumstances of the case”[8], because there is “no free standing general obligation upon an insurer, independent of its contractual rights, powers and obligations, to act in a manner which is decent and fair”.

Further, the primary Judge’s finding that the duty prevented Allianz from resiling from a “clear representation, in effect a promise” or “a considered position … of a claim of significant financial dimension”[9] could not be intended as an absolute duty never to resile from any representation.

At best, it might be said that an insurer cannot depart from significant representations without a reasonable basis, but even that narrower formulation would tend to subsume the doctrines of election, waiver and estoppel into a broader positive duty even where there was no reliance or detriment.  The potentially radical consequences would include allowing an insurer to cancel a policy for breach of the s 13(1) duty if an insured thought that losses arising from a particular occurrence were minimal and told the insurer it did not intend to make a claim.

In any event, Allianz did not breach its duty of utmost good faith by later imposing conditions upon its representation that it would not rely upon s 28(3). Allianz had not unreservedly accepted liability for the whole of the claim and its May 2018 offer endeavoured to give detailed and precise content to the losses it agreed to meet.  That is, as found by the dissenting Judge in the Full Federal Court appeal, “Allianz was giving content to its offer ‘to pay a large gratuitous amount in respect of a liability which did not exist’”[10], albeit that the insured would have had to accept the offer fairly quickly.

Dissenting judgment

Gageler J disagreed with the majority in the High Court, finding there was a waiver (not an election) by Allianz. It had communicated “an informed and fully formed intention to relinquish or abandon” its rights under s 28(3). It was also estopped from asserting those rights, reliance having a “temporal dimension”. His Honour said that a party must be held to a representation when reliance upon it “has led another party to refrain from taking action which might realistically have led to a better outcome for [it]”. The insured need not prove that it would, in fact, have been better off.

Equally, his Honour found that the May 2018 conditional withdrawal of the May 2017 representation was in breach of Allianz’s duty of utmost good faith, because the insured allowed Allianz to adjust the claim for a year after the representation.  Allianz’s later reassertion of its s 28(3) rights was “unreasonable, indeed capricious … [and] ‘unbusinesslike’.”

The take-home for insurers

The High Court’s decision should arm insurers with the confidence to negotiate for the resolution of indemnity disputes without the fear of being later bound to aspects of its offers.  However, Allianz’s success hinged in part upon the fact that its grant of indemnity related only to part of the claim, so that the majority in the High Court was satisfied that the later assertion of rights under s 28(3) of the Insurance Contracts Act 1984 (Cth) could be viewed as an offer to numerically quantify the original partial grant rather than the withdrawal of a promise.  Had indemnity been granted in full notwithstanding a known s 28(3) defence, the insurer’s position may have been more difficult.

It would certainly be prudent for an insurer offering to abandon a legal or contractual right to do so only on a “without prejudice” basis and, of course, always to reserve rights under its policy and at law and to base grants of indemnity on facts known at the time of the grant.

If you have any questions, please contact Partner Mark Doepel or Special Counsel Deborah Morris.

[1] Delor Vue Apartments CTS 39788 v. Allianz Australia Insurance Ltd (NSW) [2020] FCA 588

[2] Allianz Australia Insurance Ltd v. Delor Vue Apartments CTS 39788 [2021] FCAFC 121

[3] Grundt v. Great Boulder Gold Mines Pty Ltd (1937) 59 CLR 641 at 675

[4] Talacko v. Talacko (2021) 272 CLR 478 at 495-496

[5] CGU Workers Compensation (NSW) Ltd v. Garcia (2007) 69 NSWLR 680 at 693 [60]

[6] CGU Insurance Ltd v. AMP Financial Planning Pty Ltd (2007) 235 CLR 1 at 79

[7] CIC Insurance Ltd v. Bankstown Football Club Ltd (1997) 187 CLR 384 at 401-402

[8] At 441 [252] – [253]

[9] At 192-193 [346] – [347]

[10] At 512 [577]