Insurer's indemnity rights waived-a case of estoppel and utmost good faith

In Allianz Insurance Australia Ltd v. Delor Vue Apartments CTS 39788 [2021] FCAFC 121, McKerracher and Colvin JJ of the Full Federal Court (Derrington J dissenting) found that the insurer who had agreed to indemnify the insured for certain property losses, notwithstanding its knowledge of material non-disclosure by the insured (Delor), only to resile from that commitment more than a year later:

• was estopped from pursuing, and had waived and elected not to pursue, its rights to deny indemnity pursuant to s 28 of the Insurance Contracts Act (ICA), and

• had breached its duty of utmost good faith in its attempt to resile from its agreement by making a “take it or leave it” offer to Delor.

The majority decision largely affirmed the underlying decisions of Allsop CJ in Delor Vue Apartments CTS 39788 v. Allianz Insurance Australia Ltd (No 2) [2020] FCA 588 and Delor Vue Apartments CTS 39788 v. Allianz Insurance Australia Ltd (No 3) [2020] FCA 1281.

Background facts

Delor was the body corporate for an apartment block in far North Queensland. By December 2017, Delor knew that the roof construction of the apartment block was defective and in January 2017, warned residents to avoid the defects during periods of high winds. Delor obtained a policy of building and contents and liability insurance from an Allianz underwriting agency (SCI) without disclosing the known defects.

Delor had not done anything to begin rectifying the defects when Tropical Cyclone Debbie struck on 28 March 2017, causing substantial roof damage and rendering some of the apartments uninhabitable. Delor notified a claim and, during the initial claim investigations, provided information about the pre-existing defects.

On 9 May 2017 SCI wrote to Delor saying:

Despite the non-disclosure … [SCI] is pleased to confirm that we will honour the claim and provide indemnity to the Body Corporate, in line with other relevant policy terms, conditions and exclusions.

SCI’s email went on to:

• differentiate between pre-existing defects (costs associated with which would not be indemnified, with the result that Delor would have to meet these costs) and “resultant damage” (costs associated with which would be met)

• outline steps it was taking to adjust the claim, pursue recovery action against the builder and developer, arrange rectification work (including for the uninsured matters) and provide a description of the order in which work would be attended to, and

• ask Delor to cooperate with the claim investigation.

Delor gave SCI unfettered access to the property. SCI engaged engineers, arranged for a scope of works and obtained quotations. SCI had its lawyers look at a claim against the builder as it tried to quantify the cost of the work for which it had agreed to indemnify Delor. Additional defects became apparent during that process, further complicating the process. Delor also undertook to investigate what work needed to be performed.

The relationship between Delor and SCI suffered. In March 2018 SCI proposed renewal of its policy for 150% of the previous year’s premium, conditional upon rectification of the roof defects (including, the Court found, the newly-identified issues) within six months.

In May 2018 Delor accused SCI of breaching its duty of utmost good faith by delaying making its position as to indemnity clear.  Delor demanded clarity and the release of documents generated in the claim adjustment process.

SCI replied to Delor a few weeks later, saying that the indemnified work would cost approximately $919,000 while the unindemnified work would cost almost $3.6 million. SCI agreed to pay the indemnified costs subject to other conditions, but also indicated that if Delor did not confirm its agreement within 21 days, SCI would reduce its liability to nil pursuant to s 28 of the ICA. At that point, the insurer had spent some $200,000 on investigations of the rectification work.

After obtaining an extension of time from SCI, Delor’s lawyers rejected the offer. Consequently, on 22 August 2018 SCI’s lawyers wrote to Delor confirming the insurer had reduced its liability for the claim to nil.

Delor commenced proceedings in the Federal Court’s insurance list in November 2018. Orders were made for preliminary determinations of whether the insurer was entitled to reduce its liability to nil pursuant to s 28(3) of the ICA, which was answered in the affirmative (this issue is not considered further in this article) and also whether, for some other reason, the insurer was not entitled to rely upon s 28.

Election

The judgment referred to considerable confusion in the case law between election and waiver. Election is a concept that the law attaches to conduct; it does not depend upon the elector’s intention and does not require evidence of reliance or detriment. Election can only arise in circumstances where the law requires a party to choose between “inconsistent alternatives”.  In the insurance context, an election must be made by an insurer that:

• is aware of the relevant facts and can only take steps under its policy if it agrees to indemnify

• knows it can avoid a policy for fraudulent non-disclosure pursuant to s 28(2) of the ICA, or

• knows that s 28(3) allows it to reduce its liability to nil.

Therefore, the insurer could not seek to enforce rights of subrogation and access to the property and yet reserve to itself any rights to later take the course of action that it did. However, an insurer who did not yet know the ultimate extent to which its liability might be reduced pursuant to s 28(3) would not be required to elect.

Estoppel

Estoppel, on the other hand, does require both reliance and detriment. The majority found the requirements were met by Delor having:

• left the investigation and quotations up to the insurer for more than 12 months

• allowed the insurer access to the property and cooperated fully with them

• allowed the insurer to propose legal action against the builder, and

• not commenced proceedings against the insurer sooner.

Delor did not seek to prove a counter-factual of what it would have done absent the May 2017 SCI email but, that was not fatal to its case. Nor was the fact that any earlier proceedings against the insurer may only have resulted in the same finding—that s 28(3) allowed the insurer to reduce its liability to nil—fatal to its case. The majority noted that:

• self-serving evidence given with the benefit of hindsight is rarely helpful

• most litigation is settled before trial

• the dispute between Delor and the insurer had a different nature given the time that passed between the May 2017 email and the commencement of proceedings

• The insurer’s intentions in relation to the May 2017 email (described by Allsop CJ as “honourable”) may have reflected how it would have approached earlier litigation, and

• the length of the period during which Delor believed it would be indemnified made detriment more likely.

Waiver

The majority found that if the insurer’s election determinations were incorrect, it had nonetheless waived its rights for the same reasons.

Breach of the duty of utmost good faith

The majority rejected the insurer’s submission that it could not have breached its duty under s 13 of the ICA given Allsop CJ’s finding that s 28(3) did, in fact, allow it to reduce its liability to nil, saying that its breach had to be evaluated when it occurred.

Utmost good faith is significantly different from obligations of mere good faith and reasonableness in commercial contracts. As Allsop CJ said, utmost good faith “encompasses notions of fairness, reasonableness and community standards of decency and fair dealing”. The majority upheld his decision that the insurer’s change of position about s 28(3) breached its s 13 duty.

Lessons

Some aspects of the judgment are difficult to accept. Derrington J’s dissent (not discussed in this article) is a strong one. In particular, the detriment found to be sufficient to ground an estoppel (largely comprising the inability to have done things sooner) was relatively limited compared to the substantial financial cost of the claim that the insurer would not have incurred but for the May 2017 email. Further, the evidence suggested that Delor could not have raised adequate funds to conduct the work if the insurer had communicated its intention to reduce its liability to nil sooner. 

Nonetheless, if the decision on election is correct, a different outcome on estoppel and/or waiver would have made no difference to the result.

In any event, insurers should note that if they have sufficient information to raise non-disclosure, or to rely upon a policy exclusion, no steps should be taken to adjust a claim without a reservation of rights expressed in careful and unambiguous terms.