High Court – insurer’s gratuitous representations non-binding
Facts
Delor Vue Apartments, the body corporate of a North Queensland apartment complex, entered into a property insurance policy with Allianz in March 2017, five days before Tropical Cyclone Debbie, but failed to disclose known roofing defects. Allianz only became aware of the defects after the property was extensively damaged by the cyclone and a claim was made.
After investigating the defects, Allianz emailed the broker on 9 May 2017 explaining that:
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 also noted that Allianz would only cover resultant damage from the cyclone, and not the roofing repairs associated with the pre-existing defects.
In the course of the following year, Allianz and Delor Vue fell into dispute as to what rectification works were covered and a variety of other issues. In this period Allianz also become aware of further roofing defects. On 28 May 2018, Allianz’s solicitors sent a letter to Delor Vue’s representatives offering terms of settlement on a ‘take it or leave it’ basis, noting that the claim would otherwise be denied entirely for non-disclosure of the roof defects. The offer was not accepted, and Allianz duly denied indemnity.
Lower courts
At first instance the Federal Court held that Allianz would have been entitled to deny the claim in its entirety on the basis of non-disclosure of the roofing defects, but had waived that right, was estopped from resiling from its representation that it would grant indemnity and breached its duty of utmost good faith to Delor Vue. The Full Court upheld that judgment, but also found that Allianz was bound by an election not to rely on the non-disclosure. Going into the High Court appeal, Allianz had a mountain to climb, having been found liable to indemnify Delor Vue on four separate grounds.
High Court of Australia
In a four/one majority judgment, the High Court found that Allianz was entitled to deny indemnity and was not bound to indemnify Delor Vue on the basis of election, waiver, estoppel or the duty of utmost good faith.
Waiver
It was noted that, by itself, a waiver of a contractual right is rarely irrevocable. If rights were allowed to be irrevocably waived other than in exceptional circumstances, the majority reasoned, contractual rules which require variations of contracts to be in form of a deed or supported by consideration would be undermined. Allianz’s gratuitous representation that it would not rely on a defence of non-disclosure was therefore not made irrevocable by the doctrine of waiver.
It was noted that the extent of the indemnity granted by Allianz on 9 May 2017 was uncertain, in the sense that there were numerous issues left unresolved. It was also held that it was not accurate to describe Allianz’s conduct as a revocation of a waiver in any event, because the only sense in which Allianz ‘revoked’ the position set out in its 9 May 2017 email was to make indemnity conditional upon acceptance of terms of settlement offered on 28 May 2018.
Election
It was noted that in the law of contract, a party can act in a manner that affirms the existence of a contractual right by making an election between two immediately inconsistent rights. This doctrine only applies where the nature of the relevant contractual rights is such that ‘neither one may be enjoyed without the extinction of the other’.
It was held that there is no sense in which a decision by an insurer to waive a defence for pre-contractual non-disclosure under s.28(3) of the Insurance Contracts Act involves an election between alternative and inconsistent sets of rights. It was also held that Allianz could both waive an available defence and keep the contract on foot. In order to find that Allianz had irrevocably elected not to rely on an available defence, the Court would need to ‘go far wider than the doctrine of election has ever been previously explained or applied’. The majority were not prepared to go there.
Estoppel
The majority focused on the question of whether Delor Vue had suffered detriment (an essential element of estoppel) in relying on Allianz’s representation that it would not rely on the non-disclosure defence. Delor Vue argued that it suffered detriment or prejudice by firstly, losing the opportunity to challenge Allianz on indemnity in May 2017 (and potentially then resolve the conflict) and secondly, losing the opportunity to take steps to carry out repair works itself rather than being left with a damaged property for over a year.
On the first alleged detriment, it was held that there was no basis to infer (without evidence) that there was any real or substantial prospect of Delor Vue obtaining a settlement at some earlier date on more favourable terms than those offered by Allianz in May 2018. On the second alleged detriment, it was held that Delor Vue failed to establish it suffered any real detriment due to the loss of opportunity to carry out repair work sooner (and there was considerable doubt as to whether it was in a financial position to do so).
It followed that Allianz was not estopped from denying indemnity.
Good faith
The majority reasoned that Allianz could only have breached its duty of utmost good faith if it was subject to a novel duty (as an insurer) not to unreasonably depart from significant representations concerning a claim. The majority found that this novel duty could not be established because, amongst other things, it would have the effect of subsuming much of the operation of the doctrines of election, waiver and estoppel into a broader positive duty imposed on parties to insurance contracts. No reliance or detriment would need to be established by insureds if this duty was imposed on insurers.
Additionally, the majority found that when the 28 May 2018 letter is read in its full context, it is clear that Allianz was simply endeavouring to give more detailed and precise content to its earlier offer ‘to pay a large gratuitous amount in respect of a liability which did not exist’. Therefore, even if the ‘novel duty’ was imposed on Allianz, there would be no breach.
Takeaways
This decision will be welcomed by insurers with great relief. The overturned Full Court judgment posed genuine concerns for insurers about the extent to which gratuitous, good faith concessions can be made when negotiating the settlement of claims, without them becoming binding when negotiations fail. Under such constraints, insurers would likely refrain from making any gratuitous concessions or representations prior to terms of settlement being agreed.
This landmark High Court judgment confirms that insurers will generally be permitted to make gratuitous concessions and representations, without abandoning their contractual rights. Of course, insurers will still need to proceed with caution when making such concessions and representations and can avoid disputes like this one if they are couched in appropriately measured terms.
This article was written with the assistance of Patrick Hogan, Seasonal Clerk.