High Court finds that utmost good faith does not bind insurer to coverage representation
In the recent decision of Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788  HCA 38, a majority of the High Court found that the duty of utmost good faith did not prevent an insurer from resiling from a representation that it would not rely on its rights in respect of pre-contractual non-disclosure in the context of communicating about coverage with respect to a claim.
The decision provides important guidance to insurers on the potential boundaries of the duty of utmost good faith in the context of claims assessment and handling. The guidance is welcomed given the recent activity of ASIC taking action against insurers to seek declarations and penalties for breach of the duty.
The insured, Delor Vue Apartments (Delor Vue), was the body corporate for a Queensland-based apartment building complex. The complex was insured under a composite policy by Allianz (insurer). The apartment complex suffered damage on account of Tropical Cyclone Debbie during the course of the policy period and Delor Vue advanced a claim for indemnity under the policy.
The insurer arranged for the property damage to be inspected. In doing so, it uncovered a series of pre-existing defects that had not been disclosed prior to the policy being entered into. The insurer emailed Delor Vue confirming that, despite the non-disclosure, the insurer would provide indemnity to Delor Vue under the policy, however, it would not cover the costs to repair the pre-existing defects (the email).
The insurer subsequently arranged for the repair costs to be quantified. A dispute arose between Delor Vue and the insurer about the amount to be paid under the policy. The insurer then made an offer to make payment of a certain amount under the policy and advised that, if the offer was not accepted within 21 days, then it reserved its rights to reduce its liability for the claim to nil on account of the pre-contractual non-disclosure (relying on its rights under section 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA)). When the offer was not accepted, it wrote to Delor Vue informing it that it had indeed reduced its liability to nil on account of the pre-contractual non-disclosure.
Delor Vue then commenced proceedings in the Federal Court alleging, among other things, that the duty of utmost good faith prevented the insurer from relying on its rights under section 28(3) of the ICA to reduce its liability to nil. Delor Vue also relied on the doctrines of election, waiver and estoppel to support its claim.
At first instance, Allsop CJ held that the insurer was unable to rely on its rights under section 28(3) of the ICA for reasons of waiver, estoppel, and the duty of utmost good faith. A majority of the Full Federal Court (McKerracher and Colvin JJ; Derrington J in dissent) dismissed the insurer’s appeal on the grounds of election, waiver, estoppel, and breach of the duty of utmost good faith.
High Court decision
The insurer sought and obtained special leave to appeal to the High Court.
In a majority decision (Kiefel CJ, Edelman J, Steward J and Gleeson J; Gageler in dissent), the High Court found that the insurer could rely on section 28(3) of the ICA to reduce its liability to nil. In respect of the claim for breach of the duty of utmost good faith, the High Court held that:
- 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.
- The obligation to act decently and with fairness is a condition on how existing rights, powers, and duties are to be exercised or performed in the commercial world.
- There is no ‘novel’ duty on an insurer to not resile, without a reasonable basis, from a significant representation made to an insured concerning a claim.
On the other grounds found to exist in the Full Federal Court decision, the High Court held that:
- The insurer had effectively revoked its waiver and could therefore rely on section 28(3) of the ICA. The High Court noted that there are only limited exceptions to general rule that a unilateral waiver can be revoked at any time with reasonable notice. The exceptions were not established in this case.
- The insurer’s conduct in respect of the claim did not give rise to an irrevocable “election by affirmation” because it did not involve an election between alternative and inconsistent rights.
- The insurer was not estopped from relying on its rights under s 28(3) of the ICA because Delor Vue had not shown any detriment, that is, that it would suffer adverse consequences or a source of prejudice, if the insurer was entitled to revoke its waiver.
Gageler J, in dissent, stated that the duty of utmost good faith prevented the insurer from relying on its rights under section 28(3) of the ICA and the insurer was “bound to adhere to the position it had announced” and that it “was not entitled to go back on its word” or “…to blow hot and cold”. His Honour also agreed that the insurer would have been prevented from reducing its liability for the claim on account of waiver and estoppel.
The judgment provides important guidance to insurers on the boundaries of the duty of utmost good faith in the assessment and handling of claims. ASIC has recently been active in this space, having sought and obtained declarations for breach of the duty with respect to claims handling, and also having recently commenced proceedings seeking penalties against an insurer for allegedly breaching its duty of utmost good faith in the assessment of claims. This is the first time that ASIC has sought penalties for breach of the duty since the introduction of new civil penalties in 2019.
In respect of practical implications for handling claims, the decision arguably raises the bar for insureds who wish to rely on representations made by an insurer during the course of the assessment or adjustment of a claim to prevent the insurer from later exercising its statutory or contractual rights to reduce its liability or decline cover for the claim. Absent a claim grounded in the established and somewhat technical doctrines of election, waiver or estoppel, a claim that the insurer should be prevented from relying on its statutory or contractual rights on account of alleged breach of the duty of utmost good faith will likely face significant difficulties.