The recent Federal Court of Australia decision in Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd (No 2)  FCA 588 found an insurer can be estopped from changing its mind on a claim. The case provides guidance for underwriters and brokers on the need to make appropriate inquiries during the underwriting process and for claims officers to be diligent when granting indemnity. It may not be possible, nor in line with community expectations, to backtrack later on.
An ill wind blows
The Insured (Delor Vue) was the body corporate of an apartment complex in Yeppoon, Queensland. The apartment block was damaged by Tropical Cyclone Debbie on 28 March 2017, shortly after inception of the policy on 23 March 2017.
On 9 May 2017 Allianz, through its underwriting agency Strata Community Insurance (SCI), confirmed cover notwithstanding non-disclosure issues and that it would pay the claim subject to the terms of the policy. A year later, Allianz wrote to Delor Vue with a take it or leave it offer to repair the cyclone damage less the costs to rectify pre-existing defects. The letter indicated Allianz intended to reduce its liability to nil on non-disclosure and misrepresentation grounds under s 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA) if the offer was not accepted. Chief Justice Allsop found Allianz was estopped from reducing its liability despite Delor Vue failing to comply with its duty of disclosure.
The non-disclosure issue
Section 21 of the ICA, with some exceptions, generally requires an insured to disclose any matter relevant to the insurer’s decision whether to accept the risk and on what terms. This case affirms that for bundled policies containing multiple covers, such as both property damage and public liability cover, the Insured must comply with its duty of disclosure in respect of all covers. Failure to disclose a matter relevant to one of the covers but not the other can still affect a claim made under the other cover.
The case focused on s 21(1)(b) of the ICA because Allsop CJ accepted Delor Vue’s body corporate manager did not have actual knowledge of the relevant matters. Section 21(1)(b) requires disclosure of matters that a reasonable person in the circumstances could be expected to know to be a relevant matter.
What could a reasonable person be expected to ‘know’?
The court approached this task by looking at the terms of the policy, which covered property damage and public liability, including bodily injury.
Some attention was given to the degree of knowledge required and quoting the majority judges in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (In Liq)  HCA 25, Allsop CJ mentioned it means ‘considerably more than ‘believes’ or ‘suspects’ or even ‘strongly suspects’. Applying this to s 21(1)(b), the matter needed to be both:
- relevant to the insurer’s decision whether to accept the risk, and if so, on what terms; and
- something the reasonable person was expected to know to be such a matter.
After looking at the above, Allsop CJ concluded a reasonable person would have known there was an existing danger arising from defective soffits and eaves which carried a real risk of injury or death if a person was hit by a falling soffit. Furthermore, there was no policy exclusion which would remove cover for public liability caused by pre-existing defects in the property. The court found there was a failure by Delor Vue to comply with the duty in s 21(1)(b) in respect of the public liability risk in the policy. However, the court found there was no such breach of s 21(1)(b) in connection with the property risk covered by the policy.
Nevertheless, if the soffits and eaves problem was disclosed in relation to the public liability risk, SCI would have been in a position to decide for itself as to the whole of the insurance.
Allianz’s entitlement to reduce its liability to nil
In respect of non-disclosure which is not fraudulent, s 28(3) of the ICA allows the insurer to reduce its liability to put it in the position it would have been if the failure to disclose had not occurred. Allianz sought to reduce its liability to nil.
The documentary evidence provided by Allianz was not determinative. Allianz produced SCI underwriting guidelines in respect of property north of the 23rd parallel, such as Delor Vue, but they did not contain criteria about whether Delor Vue would have been offered cover or not if there was full disclosure. In fact, the underwriting guidelines stated Allianz was ‘looking to write risks’ which matched the description of Delor Vue. As the guidelines did not demonstrate whether the risk fell in or out of the SCI’s underwriting appetite, additional evidence was needed.
The court considered contemporaneous evidence that in May 2017 the state manager for SCI was of the view the claim should be denied on the basis of the matters in the engineering and builder reports that were given during the claims assessment process. However, according to the judgment, the state manager did not provide evidence about what he would have done had the risk been referred to him at the time of underwriting. Interestingly, the court appeared to infer from the state manager’s evidence in relation to the claim that it was reasonable for an underwriter who saw the building reports to have refused the risk outright at the time of underwriting, thereby allowing Allianz to now reduce its liability to nil under s 28(3).
The court did not consider the possibility that coverage may have still been offered but for a higher premium or with additional exclusions (or possibly still for the relevant building damage), as this was seemingly not raised by the parties. However if raised, the court’s reasoning process may have been quite different.
If there was non-disclosure, why was Allianz required to pay the claim?
Delor Vue asserted several legal principles in its bid to hold Allianz to its claim approval communicated on 9 May 2017. These were election, estoppel, waiver and a breach of the duty of utmost good faith.
In short, election occurs when a party needs to choose between two mutually exclusive rights, such as a right to avoid or affirm a contract. There was no such choice that needed to be made here.
The estoppel case was founded on SCI’s claim approval letter dated 9 May 2017, which stated ‘despite the non-disclosure which is present,…SCI is pleased to confirm that we will honour the claim and provide indemnity…in line with all other relevant policy terms, conditions and exclusions’. Chief Justice Alllsop interpreted this to mean Allianz did not propose to rely upon its rights under s 28. Importantly, this state of affairs was relied upon by the parties for about a year until the May 2018 letter. During this time, Allsop CJ observed the insurer could adjust the claim with Delor Vue’s cooperation, enter the property whenever it needed to, and exercise its subrogated rights. Delor Vue lost such opportunities to undertake these actions itself including contesting the insurer’s rights under s 28(3). Chief Justice Allsop considered it would be unjust, inequitable and unconscionable to allow Allianz to change its mind on claim approval.
In addition, Allsop CJ found Allianz had in fact waived an entitlement to assert a position which would be inconsistent with its claim approval decision of 9 May 2017. Allianz had expressly confirmed cover notwithstanding the non-disclosure issue. In doing so, it had full knowledge of the circumstances and had made a deliberate act to confirm cover and treat the relationship as if there was no non-disclosure. Through these actions, Allianz gained full and free access to the property to adjust the claim, and also the co-operation of Delor Vue. It had waived its right to relief under s 28(3).
Duty of utmost good faith
Referring to the case of CGU Insurance Ltd v AMP Financial Planning Pty Ltd  HCA 36, Allsop CJ noted the duty of utmost good faith requires an insurer to act consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. Dishonesty is not a prerequisite to a breach of the duty, notwithstanding the dissenting comments of Kirby J in that case. Allianz’s decision to resile from its representation made in the claim approval on 9 May 2017 was ‘unjust, unreasonable and unfair’ by reference to standards of decent commercial behaviour and breached the duty of utmost good faith. The absence of an offer to arbitrate or resolve the loss in a dispute resolution forum in the May 2018 letter, instead communicating a ‘take it or leave it offer’, also pointed to an absence of decency and fairness.
As a result, estoppel, waiver and the breach of the duty of utmost good faith prevented Allianz from relying on s 28(3).
Some concluding thoughts
Insurers and policyholders should consider the implications of this case on bundled policies, such as management liability and business pack insurance. The duty of disclosure applies to all covers, and if one cover is tainted by non-disclosure it can affect claims made under other covers. However, at least for consumer insurance contracts, the general duty may soon change.
Furthermore, Australian courts have traditionally been reluctant to find an insurer has breached the duty of utmost good faith. Even in this case the breach of the duty was a secondary consideration to the waiver and estoppel grounds. Although the judgment provides some guidance on a rare occasion when the duty was breached, it does so without providing much additional colour on when the threshold might be triggered.
A few things remain unanswered and may mean this case has a narrow application moving forward. In this case, the insured was open and honest throughout the initial assessment of the claim, and Allianz made its initial claim approval in full knowledge of the facts. What if some but not all of the information was given to Allianz before it made its decision? Would new information discovered during the intervening one year period have affected Delor Vue’s ability to rely on estoppel?
The decision also makes us wonder whether there was a duty on the specialist body corporate broker to have made more inquiries of the insured to ensure adequate investigation and disclosure of matters to the standard of the ‘reasonable person’. Under s 58 of the Insurance Contracts Act 1984 (Cth), the insurer is not required to inform the insured of their duty of disclosure if the insured is represented by its own broker. Although the insured ultimately achieved the result it wanted, if there had been more agitation on the specialist broker’s behalf before policy was bound the dispute may well have been avoided altogether.