By majority decision, the High Court has overturned a decision of the Full Court of the Federal Court concerning s 28(3) of the Insurance Contract Act 1984 (Cth). In doing so, the High Court has provided guidance as to the rights and obligations of parties to a contract of insurance, in particular with reference to the duty of utmost good faith and the ability of insurers to limit their liability in cases of non-disclosure of relevant information by an insured party.
- The rights of an insurer to reduce its liability to nil under section 28 of the Insurance Contracts Act 1984 (Cth) (ICA).
- Rules or principles which apply to preclude an insurer from limiting its liability under s 28 of the ICA.
The respondent, Delor Vue Apartments (Delor Vue), is a body corporate for a strata complex located in Queensland. In 2017 Delor Vue took out a property insurance policy over the complex with Strata Community Insurance (SCI), a subsidiary of Allianz Australia Insurance Limited (Allianz).
Five days after the policy commenced, the property insured was significantly damaged by a tropical cyclone. A claim was made under the recently incepted policy, with the proximate cause of the claimed damages being the recent weather event. In the process of adjusting the claim, it became apparent that the property was significantly impacted by latent construction defects which Delor Vue had failed to disclose prior to entering the contract of insurance. Despite Delor Vue’s non-disclosure of relevant information, the insurer informed Delor Vue that the claim made in relation to storm damage would be honoured. This was communicated in an email dated the 9th of May 2017, with engineers and builders being engaged shortly thereafter to provide a scope of works for restoration. This process took approximately one year to complete, with further defects being uncovered throughout that process.
In May 2018, Delor Vue complained that the insurer had not sufficiently clarified its position on indemnity. Delor Vue further alleged that SCI had breached its duty of utmost good faith, pursuant to section 13 of the ICA, by unduly delaying its assessment as to the extent of indemnity. SCI’s response on the 28th of May 2018 identified the quantum of indemnified damages at $918,709 with a further $3,579,432 excluded from cover on the basis that that amount represented the costs of repairing latent defects. Delor Vue were informed that if it did not accept SCI’s offer within 21 days, the offer would be reduced to nil, pursuant to the insurer’s rights under section 28(3) of the ICA for the non-disclosure of latent defects. Delor Vue rejected the offer and commenced proceedings in the Federal Court.
The decision at trial
In proceedings before a primary Judge of the Federal Court, and subsequently on appeal before the Full Court of the Federal Court, it was found in both instances that the insurer was initially entitled to remedy the insured’s non-disclosure by reducing its liability to nil under s28(3) of the ICA. However, the insurer was found to have waived its right to that remedy under the ICA by way of representing an intention to honour the claim despite the insured’s non-disclosures. The insurer was estopped from withdrawing its offer to indemnify the claim, with Delor Vue demonstrating both reliance and detriment in relation to the insurer’s representation. SCI was found to be in breach of its duty of utmost good faith under s 13 ICA, on the basis that the Court considered SCI was attempting to retract its initial representation.
The issues on appeal
- Whether equitable and common law principles apply to limit the availability of statutory remedies between parties to a contract of insurance.
- Whether withdrawing a gratuitous promise constitutes a breach of the duty of utmost good faith under s 13 ICA.
The decision on appeal
The majority of the High Court rejected the prior Court’s findings that SCI’s waiver of its rights under s 28(3) of the ICA was irrevocable. The High Court found insufficient evidence of either detriment or reliance by Delor Vue upon the insurer’s initial view on indemnity to estop the subsequent exercise of SCI’s s 28(3) rights.
The High Court concluded that SCI had neither “elected” nor “waived” its rights to rely on s28(3) of the ICA. The majority of the High Court agreed with Derrington J, who dissented in the Federal Court, in finding that the 28 May 2018 letter did not constitute a breach of SCI’s obligation to act in utmost good faith. Previous orders from the Full Court of the Federal Court have been set aside, and the appeal was allowed with costs.
Implications for you
This decision emphasises the importance for insureds of complying with disclosure obligations when entering a contract of insurance. Where materially relevant facts or circumstances go undisclosed, insurers may be entitled to rely on the provision of s28 of the ICA to limit their exposure.
The matter also serves as a reminder that particular care ought to be taken when placing property insurance to provide full details of any known defects or maintenance issues, as the flow on effect may be significant in the event of a significant property damage claim.
For insurers, this case is a useful a reminder to be careful in all communications with insureds to provide clarity around the extent of cover being granted and to provide clear guidance on what costs will be considered covered prior to those costs being incurred by an insured. However, it is also a reminder that the Court will not necessarily look unfavourably on an insurer’s attempt to appropriately rely on s28 of the ICA to reduce its exposure..