Was the insurer prevented from relying on Section 28(3) of Insurance Contracts Act, 1984 (Cth) for reasons of waiver, estoppel, and the duty of utmost good faith?

Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38 (14 December 2022)

Intro:

The case concerns an insurance contract dispute between Delor Vue Apartments and Allianz Australia Insurance Limited. The main issues are whether Allianz can rely on section 28(3) of the Insurance Contracts Act 1984 (Cth), whether Allianz's waiver of its reliance on s 28(3) was irrevocable, and whether Allianz breached its duty of utmost good faith under the Insurance Contracts Act.

Rule:

Section 28(3) of the Insurance Contracts Act 1984 (Cth) operates as a defence to reduce the amount of the insurer's liability by reference to a counterfactual assumption. It does not operate as a condition precedent, extinguishing a corresponding contractual obligation. Therefore, the doctrine of election by affirmation does not apply to make Allianz's waiver of s 28(3) irrevocable.

The duty of utmost good faith in s 13(1) of the Insurance Contracts Act 1984 (Cth) is not a free-standing or independent general duty to act in good faith. Instead, it has two aspects: (i) it is a principle upon which a contract of insurance is based, and thus assists in the recognition of particular implied duties; and (ii) it is an implied condition on existing rights, powers, and duties, governing the manner in which each contracting party must act towards the other party "in respect of any matter arising under or in relation to" the contract of insurance.

Application:

The Court found that Allianz can rely on section 28(3) of the Insurance Contracts Act 1984 (Cth), and that its waiver of reliance on this section was revocable. The doctrine of election by affirmation does not apply to make Allianz's waiver of s 28(3) irrevocable.

The Court also found that Allianz did not breach its duty of utmost good faith. The duty of utmost good faith is not a free-standing or independent general duty to act in good faith. Any assessment of whether the conduct of a party to an insurance contract has breached the duty of utmost good faith, in either of its aspects, requires consideration of the whole of the context of that party's conduct. When the relevant communications between Allianz and Delor Vue are read in context, it is clear that Allianz was not accepting liability for the whole of Delor Vue's claim.

Conclusion:

Allianz's waiver of the defence under s 28(3) of the Insurance Contracts Act was revocable, and was revoked. Delor Vue did not establish that Allianz was precluded from revoking its waiver by reason of "election", "waiver", estoppel, or the duty of utmost good faith. The Court found that Allianz did not breach its duty of utmost good faith. As a result, the appeal was allowed with costs.

Detailed Analysis

Intro:-

This is an appeal from the Full Federal Court of Australia.

Facts:-

A body corporate brings a claim for indemnity under an insurance policy following damage to apartment buildings by a cyclone. The cyclone damage exposes the existence of pre‑existing defects in the apartment buildings which the body corporate had not disclosed to the insurer. Some of those defects need to be repaired concurrently with the cyclone damage. The insurer sends the body corporate an email containing a gratuitous representation that the insurer will grant indemnity despite its power to reduce its liability arising from the body corporate's non‑disclosure. But the email is ambiguous as to the extent of indemnity offered. In particular, the insurer denies liability for defective materials and construction, and requires the body corporate to pay for rectification repairs to the roof, with the scope and costs of those works yet to be determined. The insurer also states that the roof repairs will need to be carried out before internal damage repairs can proceed.

Over the course of the next year, investigations by the insurer reveal further pre‑existing defects. A dispute eventually arises between the insurer and the body corporate. After having incurred nearly $200,000 of costs, the insurer informs the body corporate with greater precision about the extent of its offer to grant indemnity for repairs and replacements, to an estimated cost of around $918,709.90, with other repairs to be undertaken by the body corporate. The insurer informs the body corporate that, unless the body corporate agrees to the proposed terms within 21 days (later extended to more than three months), the insurer will rely on its power not to pay anything due to the non‑disclosure. The body corporate refuses the offer. The insurer denies indemnity.

At trial, the body corporate argued that the insurer was bound by its gratuitous representation that it would grant indemnity because the insurer: (i) had irrevocably elected not to exercise its power to rely on the defence arising from non‑disclosure; (ii) had waived its right to rely on the defence arising from non‑disclosure; (iii) was estopped from resiling from its representation that it would grant indemnity; and (iv) had failed to act with the utmost good faith. In the Federal Court of Australia, the primary judge (Allsop CJ) upheld the body corporate's claims on (ii), (iii), and (iv). A majority of the Full Court of the Federal Court of Australia (McKerracher and Colvin JJ, Derrington J dissenting) dismissed an appeal, finding that all four claims by the body corporate were established.

The appeal to this Court should be allowed. In the law of contract there are limited circumstances in which a gratuitous waiver of rights becomes irrevocable. In this case, where the body corporate did not establish that it had suffered any detriment in reliance upon the insurer's representation, none of those limited circumstances is present. And the insurer did not breach its duty of utmost good faith when, acting lawfully and honestly, it clarified the extent of its offer of indemnity, but required that offer to be accepted for it to waive the defence based on non-disclosure.

The decisions of the primary judge and the Full Court

In conclusions that were not challenged on appeal, the primary judge held that: (i) the failure by Delor Vue to disclose the known defects in the buildings to Allianz prior to entry into the Policy amounted to a breach of Delor Vue's duty of disclosure under s 21(1)(b) of the Insurance Contracts Act; (ii) Allianz (through its agent, SCI) would not have accepted the risk had the disclosure been made by Delor Vue; and (iii) subject to any waiver, estoppel, or failure to act with the utmost good faith, Allianz was entitled, under s 28(3) of the Insurance Contracts Act, to reduce its liability to nil for the claim made by Delor Vue for property damage consequent upon the cyclone.

The primary judge rejected the submission by Delor Vue that Allianz was bound by an election not to rely upon the defence under s 28(3) of the Insurance Contracts Act, but found that Allianz was unable to rely upon s 28(3) for reasons of waiver, estoppel, and the duty of utmost good faith. The primary judge made declarations to that effect. An injunction to "hold the insurer to its stated position" arising from the breach of the duty of utmost good faith would have been ordered but for the making of the declarations.

A majority of the Full Court dismissed an appeal by Allianz. Although their Honours refused to make an additional declaration, McKerracher and Colvin JJ accepted Delor Vue's submissions on its notice of contention to the effect that Allianz was bound by an election not to rely on the defence under s 28(3) of the Insurance Contracts Act. The appeal was otherwise dismissed.

In dissent in the Full Court, Derrington J would have allowed the appeal. His Honour considered that Allianz was not precluded from revoking its promise by any doctrine of election, waiver, or estoppel and that Allianz had not failed to act with the utmost good faith in revoking the waiver of its right to rely on the defence under s 28(3) of the Insurance Contracts Act. For the reasons below, Derrington J was correct.

Issues:-

i) Was Allianz's waiver of the defence under s 28(3) of the Insurance Contracts Act, 1984 (Cth) revocable?

ii) Was Allianz precluded from revoking its waiver by reason of "election", "waiver", estoppel, or the duty of utmost good faith?

Consideration:-

The Insurance Contracts Act: ss 13, 14, 28

Sections 13, 14 and 28 of the Insurance Contracts Act relevantly provide as follows:

"13 The duty of the utmost good faith

(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

(2) A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act.

...

14 Parties not to rely on provisions except in the utmost good faith

(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.

(2) Subsection (1) does not limit the operation of section 13.

...

28 General insurance

(1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
(a) failed to comply with the duty of disclosure; or
(b) made a misrepresentation to the insurer before the contract was entered into;

but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.

(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made."
Allianz's waiver of the s 28(3) defence

The nature of an irrevocable waiver

It has been repeatedly said that "waiver" is a term that is used in many different senses. Perhaps the most common usage of waiver is to describe an unequivocal decision by a party, communicated to the other party, not to insist upon a right or not to exercise a power.

By itself, a waiver of a right is rarely irrevocable. For that reason, it has sometimes been said that the general rule concerning a waiver of a right, "in the sense of an intimation of an intention not to enforce it", is that the mere act of representing that a right has been waived is "of itself inoperative". Similarly, it has been said that "the mere statement of an intention not to insist on a right is not effectual unless made for consideration ... A mere waiver signifies nothing more than an expression of intention not to insist upon the right". Perhaps more accurately, the legal position is that although a waiver does have legal effect in that "the waiver is binding on the waiving party, unless the waiver is effectively retracted", the waiver can generally be revoked at any time with reasonable notice.

Nevertheless, exceptions or "special cases" exist where a unilateral waiver cannot be revoked. One exception is where the strength of the interest of finality in litigation can sometimes mean that a waiver of particular rights related to litigation is irrevocable. For instance, the waiver of legal professional privilege will be irrevocable "where the actions of a party are plainly inconsistent with the maintenance of the confidentiality which the privilege is intended to protect". A similar approach, which also "depended upon considerations founded in the nature of the adversarial litigious process" that are "not relevant to the identification of the rights and obligations of parties to contracts", was taken in The Commonwealth v Verwayen by Toohey J and Gaudron J. Their Honours concluded that an undertaking not to plead a limitations defence had become irrevocable. But, even then, that view did not command the support of a majority of the Court. Brennan J, by contrast, considered that the "ordinary principles of estoppel" applied to the waiver in that case so that it could be revoked at any time before it had been relied upon to the detriment of the other party, or otherwise until judgment was entered so that no amendment to the pleading was possible.

Outside the context of litigation, and in the law of contract, the circumstances in which a waiver cannot be revoked have always been exceptional. If such circumstances were not both exceptional and justified they would undermine other contractual rules, including those generally requiring that variation of a contract be in the form of a deed or supported by consideration. Hence, aside from circumstances where a legal right can no longer be enforced due to entry into a deed, a fresh agreement for consideration, or expiry of a limitation period, the general rule is that, despite a "mere naked promise ... not founded upon any consideration" not to enforce a legal right, the legal right may continue to be enforced until it is fully satisfied.

For the same reasons, the development of loose legal rules for an irrevocable waiver would undermine formalities where they are required for written contracts. Indeed, writing after the decision of Denning J in Central London Property Trust Ltd v High Trees House Ltd, Cheshire and Fifoot observed that "in their efforts to circumvent this objection ... the courts have excelled themselves in ingenuity, if not in wisdom".

Consistently with the stance of parties in previous litigation concerning waiver in this Court, Delor Vue properly did not, at any stage in this litigation, submit that there was any independent doctrine precluding revocation of a waiver based on concepts such as "unfairness" or based on any assertion of notions of waiver peculiar to insurance contracts. Such submissions would require revision of our understanding of basic principles of contract, even if confined to insurance contracts. At the very least, such an approach should not be taken by a court without argument. Delor Vue's submissions were more modest but, if accepted, would nevertheless undermine the integrity of established contractual rules by expanding the principles of election by affirmation, or extinguishment of rights, in such a way as to make irrevocable a unilateral waiver of a defence to liability by a party to a contract, outside the context of litigation.

The waiver and its revocation by Allianz

As described above, the extent to which Allianz undertook to grant indemnity in the 9 May 2017 email was ambiguous. Allianz undertook in the email to cover the costs associated with "[r]esultant damage including but not limited to internal water damage, fascia, guttering and roof sheeting (for those buildings which lost roof sheeting only)" but not for the overlapping category of "[d]efective materials and construction of the roof". Nevertheless, Allianz made no submission in this Court that the ambiguities in its 9 May 2017 email, and the lack of any reference to s 28(3) of the Insurance Contracts Act, precluded an interpretation of that email as containing an unequivocal waiver of Allianz's defence under s 28(3).

Putting aside its ambiguities, and on the assumption that the 9 May 2017 email contained a waiver of Allianz's defence under s 28(3), Allianz did not express the extent of the defence that would otherwise have applied. It did not express in the 9 May 2017 email, and could not have been certain of, the extent to which it would have been entitled under s 28(3) to reduce its liability in respect of Delor Vue's claim.

Although the primary judge made a carefully worded declaration that Allianz was entitled to a remedy that would reduce its liability to nil "for the claim made consequent on damage caused to [Delor Vue's] property", this did not mean that Allianz was free from all liability to Delor Vue. Assuming that Allianz was entitled to reduce its liability under s 28(3) on the basis that it would not have issued any policy if the disclosure had been made, it may be that the "amount which would place the insurer in the position it would have been in" but for the non‑disclosure would have required Allianz to have refunded to Delor Vue all premiums paid by Delor Vue.

It is not entirely accurate to describe the waiver by Allianz as having been revoked by Allianz's letter to Delor Vue's solicitors on 28 May 2018. In that letter, Allianz undertook to grant indemnity, subject to conditions, for estimated costs of $918,709.90. The only sense in which Allianz could be said to have "revoked" its waiver on 28 May 2018 was that the continued operation of the waiver was made conditional upon acceptance of terms, in order to resolve the dispute between the parties, within a reasonable time (21 days, later extended to more than three months). It is only in that sense that the waiver can be described as having been revoked.

Election by affirmation cannot be applied to Allianz's waiver

By its proposed notice of contention in this Court, Delor Vue sought leave to support the conclusion of the majority of the Full Court on the basis that Allianz's representation that it would not rely on s 28(3) of the Insurance Contracts Act was a choice between alternative and inconsistent sets of rights. Delor Vue should be given leave to file its notice of contention but its submission that the doctrine of election by affirmation applied to make Allianz's waiver irrevocable is, nevertheless, unsustainable.

As to the historical application of election by affirmation, s 28(3) does not operate to make disclosure by the insured a condition precedent to any obligation of the insurer. Different views about the operation of s 28(3) have been expressed[60]. On one view, s 28(3) operates on the basis of the existence of an insurance policy by reference to the additional premium that would have been charged if there had been full disclosure. On another view, s 28(3) can operate on the basis that the insurer would not have accepted the policy at all, so that liability may be reduced as low as the amount of the premium paid. On either view, however, s 28(3) operates only as a defence to reduce the amount of the insurer's liability by reference to a counterfactual assumption. It does not operate as a condition precedent, extinguishing a corresponding contractual obligation. It is therefore unnecessary to consider whether, in the modern law, a waiver of a condition precedent is irrevocable without detrimental reliance.

As to the modern approach to election by affirmation, s 28(3) does not give the insurer any power to elect to affirm the contract rather than to avoid or terminate its contractual obligations. There is no sense in which a decision by an insurer to waive the defence under s 28(3) involves an election between alternative and inconsistent sets of rights (or even an immediate inconsistency between continuing legal positions). With or without waiver, the insurance contract remains on foot and reliance on the defence under s 28(3) is not immediately inconsistent with any of the contractual rights. In its operation in relation to rights, s 28(3) stands in stark contrast with s 28(2), which is a statutory recognition of the power of an insurer to avoid a contract from its inception for a fraudulent non‑disclosure or a fraudulent misrepresentation. An insurer that elects to waive the power under s 28(2) elects to affirm the set of continuing rights under the relevant contract of insurance rather than to exercise the immediately inconsistent power to avoid the contract from inception.

Indeed, the submissions of Delor Vue and the decision of the majority of the Full Court to the contrary are directly inconsistent with the reasoning and unanimous result in this Court in Gardiner. Although numerous facts were disputed in that case, Gummow, Hayne and Kiefel JJ proceeded on the assumption that a lender and an indemnifier had represented to an indemnified party that the indemnity "remained effective and enforceable, despite past defaults". The defaults concerned failures to make punctual performance under separate agreements with the lender. Despite that representation, their Honours said that "there was no election between inconsistent rights" and that to hold the lender and indemnifier to the representation would "supplant accepted principles governing whether an estoppel is established and whether a contract has been varied".

The submission of Delor Vue that Allianz had irrevocably elected not to rely on the defence under s 28(3) can be aptly expressed in the words of Rix LJ in Kosmar Villa Holidays plc v Trustees of Syndicate 1243[68] as a submission that "goes far wider than the doctrine of election has ever been previously explained or applied":-

"While a contract is in operation, it is important to know, in circumstances where it lies in the choice of a party, whether the contract lives or dies (or at least whether purported performance under it, such as a delivery of goods, is accepted or not); and, whether the option is for life or death, acceptance or rejection, the choice is unilateral and irrevocable. But when it is merely a defence to a claim that is in question, there would not seem to be the same necessity to choose timeously and irrevocably between reliance or not on the defence in question."

Allianz's duty of utmost good faith

The nature of the duty of utmost good faith

Section 13(1) of the Insurance Contracts Act, set out earlier in these reasons, is an instantiation of the centuries‑old common law "duty of utmost good faith" in commercial contracts. Like the common law duty, the duty in s 13(1) is not a free‑standing or "independent general duty to act in good faith". Rather, as s 13(1) provides, the duty has two aspects: (i) it is a principle upon which a contract of insurance is "based" and thus assists in the recognition of particular implied duties; and (ii) it is an implied condition on existing rights, powers, and duties, governing the manner in which each contracting party must act towards the other party "in respect of any matter arising under or in relation to" the contract of insurance.

Each of these two aspects of the duty of utmost good faith applies equally to the insurer and to the insured. Indeed, it has long been recognised that the duty of utmost good faith applies symmetrically to both parties to an insurance contract. This symmetrical operation was generally incorporated into s 13(1) of the Insurance Contracts Act.

The first aspect of the duty of utmost good faith, as the principle on which the contract of insurance is based, requires various implied duties to be recognised. The most widely recognised of these is the duty of full disclosure. As early as 1766, Lord Mansfield said in the insurance context in Carter v Boehm, albeit in remarks intended to apply to all contracts, that "[g]ood faith forbids either party by concealing what [they] privately know[], to draw the other into a bargain" where the other is ignorant of the concealed fact. The duty of disclosure by an insured is now the subject of a detailed statutory regime in Divs 1 and 3 of Pt IV of the Insurance Contracts Act.

The second aspect of the duty of utmost good faith, as an implied condition, requires each party "to have regard to more than its own interests when exercising its rights and powers under the contract of insurance". This condition upon the exercise of rights and powers and the performance of obligations is not fiduciary. It does not require a party to an insurance contract to exercise rights or powers or to perform obligations only in the interests of the other party. But nor is the condition limited to honest performance. The duty to act honestly, or not deceitfully, has been said to be "a duty of universal obligation". Section 13(1) would add nothing to the conditions on the exercise of those contractual rights and powers, and the performance of obligations, if it merely required the exercise or performance to be honest.

It has therefore been said that rights and powers must be exercised, and duties must be performed, "consistently with commercial standards of decency and fairness" as distinct from standards of decency and fairness more generally. Several examples can be given of how the duty of utmost good faith conditions the exercise of contractual rights and powers and the performance of obligations. The refusal to cooperate with another contractual party in the exercise of a power can involve a lack of utmost good faith. The failure, "within a reasonable time of the receipt of the claim", to perform the obligation to accept or refuse a claim can involve a lack of utmost good faith. And, as s 14 of the Insurance Contracts Act provides, reliance upon a power specifically provided to one party in the contract will be precluded if the reliance would involve a lack of utmost good faith.

Allianz did not breach its duty of utmost good faith

By whichever approach this novel duty of a party to an insurance contract is sought to be derived, it cannot be accepted. It is not fatal to the existence of this novel duty that Delor Vue was unable to point to a single case identifying a remotely similar duty over the period of more than 250 years since a duty of utmost good faith in insurance contracts was recognised. Nor is it fatal that the Australian Law Reform Commission did not contemplate anything like it in the report which formed the basis of the Insurance Contracts Act[132]. But, in a context in which insurers have been operating for nearly 40 years on the basis of a particular understanding of the operation of the Insurance Contracts Act, these matters are not a promising start.

What is fatal to the recognition of this novel duty is that it would not be coherent either with the operation of existing legal doctrines, whose existence was well established at the time of the Insurance Contracts Act, or with the Insurance Contracts Act itself. In relation to insurers, it would have the effect of subsuming much of the operation of the doctrines of election, waiver, and estoppel into a broader positive duty not to unreasonably depart from significant representations. No reliance or detriment would be required.

The recognition of such a duty would also have radical consequences for an insured that would not be coherent with the generally symmetrical operation of the Insurance Contracts Act. Div 2 of Pt IV of the Insurance Contracts Act is concerned with misrepresentations by an insured. Suppose that, following the occurrence of an insured event, an insured party, carelessly assuming that the damage was minimal, made a representation to their insurer that no claim would be brought under the policy. The factual aspect of that representation – the "state of affairs" – being the present state of mind of the insured party[133] would not be a misrepresentation by the insured within s 24 of the Insurance Contracts Act. But if it were a breach of the duty of utmost good faith for the insured to depart unreasonably from their representation concerning a claim, then the insurer could cancel the contract under s 60(1)(a) if a claim was subsequently brought by the insured.

These matters are sufficient to conclude that there is no basis to find that Allianz breached its duty of utmost good faith by imposing conditions upon its representation that it would not rely on s 28(3) of the Insurance Contracts Act. In any event, however, even if there were a duty of the kind suggested by the primary judge or by Delor Vue, that duty would not have been breached by Allianz.

Delor Vue's submission that Allianz's conduct amounted to a breach of a duty not to resile, without a reasonable basis, from its representation is based on the premise that it is possible to fillet the representation by Allianz that it would not rely on s 28(3) of the Insurance Contracts Act from the remainder of the 9 May 2017 email. That premise is incorrect. Any assessment of whether the conduct of a party to an insurance contract has breached the duty of utmost good faith, in either of its aspects, requires consideration of the whole of the context of that party's conduct.

When the representation in the 9 May 2017 email is read in its full context, it is clear that Allianz was not accepting liability for the whole of Delor Vue's claim. Allianz's representation that it would not rely on s 28(3) was inseparable from Allianz's limited offer of indemnity that excluded "[d]efective materials and construction of the roof, including but not limited to tie downs, rafters and timbers and soffit" and required Delor Vue to pay for roof repairs of a scope yet to be defined, but to be undertaken prior to internal repairs.

And when the representation in the 28 May 2018 letter is read in its full context, which included almost a year of dispute about the terms of Allianz's limited offer of indemnity, it is clear that Allianz was endeavouring to give more detailed and precise content to the terms of its 9 May 2017 email (which were set out in full). That included greater precision about the repairs and replacements that Allianz would undertake, to an estimated cost of around $918,709.90, in addition to costs of nearly $200,000 that it had already incurred.

When the 9 May 2017 email and the 28 May 2018 letter are both read in context, the appropriate characterisation of the 28 May 2018 letter, in the words of Derrington J in dissent in the Full Court, is that Allianz was giving content to its offer "to pay a large gratuitous amount in respect of a liability which did not exist", albeit with a limited time for acceptance (ultimately, around three months). Even if the novel duty proposed by Delor Vue were accepted, the 28 May 2018 letter could not be a breach of the duty of utmost good faith.

For these reasons, Allianz did not breach its duty of utmost good faith. It is, therefore, unnecessary to consider any of Allianz's submissions concerning the utility or availability of a declaration if a breach had occurred, including submissions that Delor Vue: (i) did not seek any declaration of a breach of s 13; (ii) sought only damages for breach of s 13, in place of which a declaration was made; (iii) led no evidence of any consequential loss suffered from the alleged breach of the duty of utmost good faith and obtained no award of damages from the primary judge; and (iv) did not seek or obtain any injunction to enforce the duty alleged to have been breached.

Conclusion:-

Allianz's waiver of the defence under s 28(3) of the Insurance Contracts Act was revocable and was revoked. Delor Vue did not establish that Allianz was precluded from revoking its waiver by reason of "election", "waiver", estoppel, or the duty of utmost good faith. Orders should be made as follows:

1. The appeal be allowed with costs.