Locking the Insurer In - The Key Perspective

Introduction


In Australia, the duty of utmost good faith continues to develop a strong voice in governing the relationship between the insurer and the insured.


As I wrote last week, the Full Federal Court of Australia (by a 2:1 majority) has dismissed Allianz’s appeal from a decision of the Federal Court which held Allianz bound to its intimation to the insured that indemnity had been granted.


Last week I looked at the principles which the Court found prevented Allianz from resiling from its position. This week I look at how the Court contemplated punishing Allianz for resiling from its position by upholding the findings of the trial judge that the conduct of Allianz in resiling from its considered position was unjust, unreasonable and unfair and below a commercial standard of decency and fairness and therefore a failure to conform to the statutory requirement that the insurer act in utmost good faith.


But does the duty of utmost good faith stand on its own two feet or does it merely add a bit of colour where other duties and obligations have been breached? Is it a free spirit or must it be anchored to other breaches by one of the parties to the policy?


The Facts


In late March 2017, Cyclone Debbie inflicted significant damage along the north Queensland Coast.


At the time the insured held an insurance policy with Allianz. It submitted a claim for indemnity in respect of losses suffered in the cyclone.


On 9 May 2017, Allianz granted the insured indemnity in respect of its losses, to be adjusted. Allianz wrote to the insured in the following terms: -

‘Despite the non-disclosure issue (known defects) which is present, Strata Community Insurance[1]


(SCI) is pleased to confirm that we will honour the claim and provide indemnity to

the Body Corporate, in line with all other relevant policy terms, conditions and

exclusions.’


Some twelve months later, after working with the insured to adjust the value of the claim, Allianz resiled from its decision to grant indemnity and offered to settle the matter with the insured on a ‘take-it-or-leave-it’ basis.


The insured brought proceedings against Allianz seeking to hold it to its decision to grant indemnity. The Federal Court found for the insured. The majority of the Full Federal Court agreed.

The Decisions


Introduction


In addressing how the duty of utmost good faith works, it is useful to start with the decision of the trial judge.


Allsop CJ


It is worth noting that the trial judge introduced his discussion about the duty of utmost good faith and its application to the facts of this particular matter as a: -


separate consideration of the conduct of Allianz in 2018 in resiling from its earlier stated position, as a breach of the obligation of good faith as contained in s 13 of the Act.


In so doing, he immediately framed the duty as a standalone obligation unfettered by any other findings.


That is consistent with the following further passage from his judgment in which he defined the duty:-


It is not appropriate to seek to define the standard within s 13. It is a normative standard involving the considerations referred to in CGU v AMP in the High Court and in the Full Court. Description of elements and circumstances better illuminate the standard involved. The expression of Gleeson CJ and Crennan J of a “commercial standard of decency and fairness” is, for these circumstances, most apt. ……… Even if it be that the division of financial responsibility in the 28 May 2018 letter turns out to be the correct division, there was still a lack of decency and fairness in the position that was taken. If that was Allianz’s view, a view reached after all the advantages of access to the property, adjusting the claim, and expecting and being given the co-operation of the insured, decency and fairness required an offer to arbitrate or litigate the loss in some acceptable dispute resolution forum on the basis that the 9 May 2017 email represented or promised: the policy terms. Decency and fairness were not displayed by threatening an approach previously clearly disavowed which involved further significant personal strain and financial risk to these people, unless a take-it-or-leave-it offer was accepted.


Notably no mention is made in this passage to the findings of election, estoppel or waiver. The duty of utmost good faith stands apart and on its own two feet.


Ultimately the trial judge made a declaration that Allianz was in breach of its duty of good faith and, relevantly, would have granted an injunction had the defences of estoppel and waiver not been sustained.


The Majority of the Full Federal Court


In the Full Court, Allianz shied away from suggesting that any breach of the duty of utmost good faith depended upon there being other findings against the insurer. But it did seek to subject the duty of good faith to the duty of disclosure.


Allianz’s duty of utmost good faith, it submitted, did not prevent it from exercising in full its rights in the face of the insured’s non-disclosure.


The majority rejected this submission observing that ‘to reason in that manner is to evaluate the conduct of Allianz with hindsight. The conduct of Allianz is not vindicated or justified as fair and decent just because it was ultimately successful in its claim’.


The impugned conduct occurred at different times and, therefore, had to be considered separately and independently.


The Minority of the Full Federal Court


The minority did not accept that there was any estoppel, election or waiver but recognised that the insured had breached its duty of disclosure entitling the insurer to reduce its liability to nil.


It is in that context that any breach by the insurer of its duty of utmost good faith (resiling from its earlier promise) had to be considered by the minority and it is that context which posed an important question -did the duty of utmost good faith require Allianz to accept liability for a significant claim where it was not otherwise obliged to indemnify? The minority accepted that in some circumstances the answer might be yes but found in the circumstances of this case that there had been no breach of duty: -


Whilst Allianz’s indication that it would partially indemnify for the losses suffered may have provided some comfort for a period of time, the insurer disabusing the insured of any belief it had engendered and thereby returning the insured to the position which it would have been in had the intimation not been made will cause it no real detriment. Moreover, in making its decision to resile, Allianz is entitled to act in the protection of its interests. I t did not breach its duty of utmost good faith in doing so and it is entitled to succeed on this ground as well.


Key Points


The duty of utmost good faith stands alone capable of affording its own relief even where other causes of actions have failed.


But care needs to be exercised when determining what that relief should be. The idea that the duty can make the insurer (or for that matter the insured) worse off justifies that care.


The name of the case is Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2021] FCAFC 121 (9 July 2021). You can find it here.


If you have any queries, reach out to me.


___________________________________ [1] An Allianz backed underwriting agency

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