Duty of utmost good faith does not require an insurer to be generally decent and fair

Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 [2022] HCA 38

The High Court has considered whether an insurer must stick to any representation it makes in relation to a claim for indemnity where the insurer had indicated that it will not rely on an available defence to decline indemnity. The High Court specifically considered whether to resile from such a representation (and in doing so, to ultimately decline indemnity) would constitute a breach of the duty of utmost good faith.

The majority found that it would not constitute a breach, because while the duty of utmost good faith is said to require parties to act consistently with commercial standards of decency and fairness, this is merely a condition imposed on existing rights, powers and duties and there is otherwise no free-standing general obligation upon an insurer to act in a manner that is decent and fair. In dissent, Justice Gageler disagreed, finding that such conduct of an insurer is "unreasonable, indeed capricious", "oppressive and unbusinesslike" and therefore a breach of the duty of utmost good faith.

Background facts

Delor Vue Apartments CTS 39788 (DV), the body corporate for an apartment complex in North Queensland, entered into a policy of insurance issued by Allianz Australia Limited (Allianz) which covered property damage and public liability. DV made a claim on the property for damage sustained to the apartment complex caused by Cyclone Debbie, which struck Queensland in March and April 2017.

In breach of its pre-contractual duty of disclosure,¹ DV had failed to disclose the existence of various pre-existing defects in the apartment complex, which were such that Allianz would not have issued the insurance policy had it been made aware of these. It followed (and was not in issue) that Allianz was entitled, under section 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA), to reduce its liability to nil for any claim made by DV for property damage.

In an email on 9 May 2017, Allianz's agent conveyed that, notwithstanding the non-disclosure issue, it would grant indemnity for some of the claimed damage, but only a limited (and somewhat ambiguous) extent of it. Allianz stipulated that DV would need to pay for the costs of some of the repairs, and noted that the roof repairs would need to be completed before internal works could proceed.

Over the course of the following year, Allianz's investigations continued and revealed further pre-existing defects. In May 2018, a dispute arose between Allianz and DV. In a letter of 28 May 2018, Allianz's agent set out in more detail Allianz's offer to grant indemnity for repairs and replacements to an estimated cost of $918,709.90, with other repairs to be undertaken by the body corporate. Allianz informed DV that, unless it agreed to the proposed terms of its offer within 21 days ─ which ended up being extended to over three months ─ Allianz would rely on its entitlement to decline indemnity on the basis of DV's non-disclosure.

DV rejected the offer, prompting Allianz to decline indemnity. DV commenced proceedings in the Federal Court against Allianz seeking declarations in relation to its entitlement to indemnity.

The decisions of the primary judge and Full Court

At first instance, Chief Justice Allsop held that Allianz was precluded from relying on the non-disclosure issue to decline indemnity for three reasons:

1. Allianz had waived its right to do so by its email of 9 May 2017, in which it conveyed a gratuitous grant of indemnity, and was not entitled to revoke that waiver.

2. As of 28 May 2018, Allianz was estopped from departing from the position stated in the letter of that date, being a grant of indemnity to an estimated cost of $918,709.90.

3. Allianz's attempt to depart from that position was a breach of its duty to act with the utmost good faith.

The primary judge made declarations to that effect.

Allianz was unsuccessful on appeal to the Full Federal Court, where the majority upheld the primary decision and agreed with the three above conclusions, save to clarify that Allianz was bound by its "election" to not rely on the non-disclosure issue, rather than any "waiver" of its entitlement to do so.

High Court decision

Allianz subsequently appealed to the High Court. The majority disagreed with all three conclusions and overturned the declarations, for the following reasons.

Waiver/election and revocation

The Court first noted that it was not entirely accurate to describe Allianz's letter of 28 May 2018 as constituting a revocation of its waiver and pointed out that the only sense in which the waiver could be said to have been revoked was that the continued operation of the waiver was made conditional upon the acceptance of terms (being the terms of the offer set out in that letter).

It went on to consider the legal doctrines associated with "waivers" as compared with "elections by affirmation" and "extinguishments of rights" and the extent to which each was able to be withdrawn or revoked. The Court held that in the law of contract, it is only in exceptional circumstances that a waiver cannot be revoked, and no exceptional circumstances were demonstrated here.

The Court also said that, if accepted, DV's position (or the Full Court's findings) would have the effect of expanding the principles of election by affirmation, or extinguishment of rights, which would undermine the integrity of established contractual rules, including those generally requiring a variation of a contract to be in the form of a deed and supported by consideration. It noted "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 operate until it is fully satisfied".

Estoppel

The High Court also disagreed with the Full Court's findings that Allianz was estopped from revoking its waiver. The only area of disagreement was whether DV had established that it would suffer adverse consequences or prejudice if Allianz was entitled to revoke its waiver.

Contrary to the findings of the courts below, the High Court found that DV had not proven that any detriment could be inferred to have arisen as a result of the alleged losses of DV's opportunities, being the opportunities to either compromise a claim for indemnity on more favourable terms than set out in Allianz's offer of 28 May 2018, or to engage in repair works itself between May 2017 and May 2018. As a result, the finding that Allianz was estopped was overturned.

Duty of utmost good faith

In considering whether Allianz's conduct constituted a breach of the duty of utmost good faith imposed on parties to insurance contracts under section 13 of the ICA, the majority noted that the duty requires parties to exercise rights and powers and perform duties "'consistently with commercial standards of decency and fairness' as distinct from standards of decency and fairness more generally".

The Court provided several specific examples of how the duty conditions the exercise of contractual rights and powers and the performance of obligations, noting that each of the following would involve a lack of utmost good faith:

• the refusal to cooperate with another contractual party in the exercise of a power
• the failure, within a reasonable time of receiving a claim, to perform the obligation to accept or refuse the claim; and
• in some circumstances, reliance upon a power specifically provided to one party in the contract.

In relation to the present case, however, the Court did not agree that there was a lack of utmost good faith. The findings of the High Court on this issue can be summarised as follows.

1. The findings of the primary judge had the effect of creating a novel implied duty which required parties to an insurance contract never to resile from any representation, which cannot be the case.

The primary judge concluded that the duty of utmost good faith precluded Allianz from resiling from "the clear representation, in effect a promise" in the 9 May 2017 email, or resiling from "a considered position...of a claim of significant financial dimension". The High Court commented that this conclusion effectively suggested the existence of a duty not to resile from any representation, which cannot be the case.

Even if such a novel duty were confined to a specific duty not to depart from significant representations concerning a claim without a reasonable basis (as the Court said might be more plausible), the High Court said to recognise such a duty would not be coherent with the operation of existing legal doctrines, whose existence was well established at the time of the ICA, nor with the ICA itself. It would also have radical consequences for an insured ─ for example, if an insured made a representation to their insurer following an insured event that no claim was to be made, on the basis of a careless assumption that the damage was minimal, which turned out to be wrong. The proposed novel duty would mean that the insurer would be entitled to decline indemnity for any claim subsequently made by the insured on the basis of that prior representation.

2. Even if such a novel duty did exist, it would not have been breached by Allianz and Allianz otherwise did not breach its duty of utmost good faith.

When the 9 May 2017 email and 28 May 2018 letter were read in their full context, as is required for any assessment of whether the conduct of a party breached the duty of utmost good faith, it was clear that Allianz was not accepting liability for the whole of DV's claim. The appropriate characterisation of the 28 May 2018 letter was said to have been 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. The Court held that this could not be a breach of the duty of utmost good faith.

Findings in dissent

Justice Gageler agreed all of the conclusions and declarations made by the primary judge and Full Court.

His Honour was of the view that, whether or not the fully informed and unequivocally communicated decision of Allianz not to rely on the non-disclosure issue constituted a legally operative waiver, the duty to act with the utmost good faith required that Allianz was from then on bound to adhere to the position that it had announced, and was not entitled to go back on its word.

Implications for insureds and insurers

This decision will provide some comfort for insurers wishing to communicate preliminary positions on indemnity or engaging in negotiations with insureds to settle a claim.

For abundant caution, however, reservations of rights should still always be expressed in careful and unambiguous terms, particularly where investigations into circumstances that may trigger a policy exclusion or breach of condition are ongoing, or where there is scope for the position on indemnity to develop or change ─ such as where proceedings are on foot).

The decision also provides valuable guidance on what the duty to act with utmost good faith entails and the primacy of the established law of contract.

¹ owed pursuant to section 21(1)(b) of the Insurance Contracts Act 1984 (Cth).

Photo by Wiktor Karkocha on Unsplash