By Tania Smith, Special Counsel – [SOURCE]
A recent High Court Decision provides a good reminder and clarity on the operation of waiver, election, estoppel and good faith in respect to resiling from a representation.
The High Court handed down its judgement in December 2022, setting aside the orders of the Full Federal Court and in their place ordering that an appeal be allowed with costs and declarations and orders of the Federal Court of Australia also be set aside and in its place an order that the initiating proceeding be dismissed with costs.
By way of background, the insured failed to disclose to the insurer, pre-existing defects in respect to a body corporate building.The insurer was notified of a claim under the public liability and property damage policy, following damage caused by a cyclone.
Under s21 of the Insurance Contracts Act 1984 (Cth) (the Act), the insured had an obligation to disclose the pre-existing defects. Pursuant to s28(3) of the Act, due to the failure under s21 of the Act, the liability of the insurer would have been reduced to the amount that would place the insurer in a position if the failure (being the non-disclosure) hadn’t occurred. Effectively, the insurer’s liability would be reduced to nil (in respect to the portions of the building that involved the non-disclosed defects).
Notwithstanding the above, the insurer (by its agent) sent an email representation that it will grant indemnity to the insurer notwithstanding the failure to disclose the pre-existing defects, however it did contain some ambiguity in respect to the indemnity offered (the Representation).
After further investigation revealed further pre-existing defects, a dispute arose, and the insurer proposed terms of a settlement (which included conditions upon which it would provide indemnity). The settlement offer provided a stipulated time for acceptance, otherwise the insurer will rely on the non-disclosureby the insured to refuse indemnity. The insured did not agree to the settlement offer and the insurer denied indemnity.
The question before the High Court predominantly centred around the determination of if the insurer was able to resile fromthe earlier Representation that it would indemnity the insured.
At first instance, the insured argued that the insurer cannot resile form the representation on the basis of election, waiver, estoppel and good faith. Both the Court of first instance and the Full Court of the Federal Court of Australia ordered in favour of the insured. As noted above, the High Court has overturned that decision.
The High Court noted that a waiver is ‘rarely irrevocable’, although there are special circumstances in which a waiver can be revoked (including legal professional privilege). However, this matter did not fall into one of those special circumstances.
To establish estoppel, there must be a reliance to the detriment of the insured. A lost of opportunity to carry out the works and to challenge the insured position on indemnity was contended by the insured. However, whilst detriment (in respect to estoppel) does not have to be limited to monetaryloss, there has been no earlier authority run to trial on the detriment contended by the insured. In any event, it was too late (now that it was before the High Court) to ‘construct a case for the first time’ and the insured had not proved any ‘acts, facts or circumstances’ which to infer detriment.
Election by affirmation
The doctrine requires a ‘choice in relation to alternative rights’, which ‘once made, should be irrevocable’. However, the High Court held that the decision of the insurer to waive its defence under the Act did not involve an election between ‘alternative set of rights’. According, it was not applicable.
However, the court considered it strongly arguable that a party’s election in respect to ‘inconsistent rights’ to affirm an obligation will generally only be irrevocable if the other party has relied on it to their detriment.
There is a statutory provision for good faith under s13(1) of the Act. The duty of good faith applies ‘equally to the insurer and to the insured’ and requires ‘various implied duties to be recognised’ including the duty of full disclosure. Further, there is implied condition for each party to have ‘regard to more than its own interest when exercising its rights and powers under a contact of insurance’.
The insured contended that the insured had an obligation to ‘make a clear and timeous decision in respect to the claim’ to prevent the insurer ‘from reversing its position on the claim’.
The High Court held that the insurer did not ‘reverse’ its position. ‘An insurer and the insured do not owe a duty never to depart from representations made to each other’. Acceptance of the duty contended by the insured would have ‘the effect of subsuming much of the operation of doctrines of election, waiver and estoppel into a broader positive duty not to unreasonably depart from significant representation. No reliance or detriment would be required’ and not ‘coherent with symmetrical operation of a duty.
Further, having regard to all the conduct (considering all correspondence), the High Court considered that the settlement offer proposed conditions which qualified the earlier Representation which required acceptance in order to grant a waiver of its defence under the Act.
The Court held that the duty of good faith had not been breached by the insurer.
A copy of this case can be found at: Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 (hcourt.gov.au)