A Change of Mind
On 14 December 2022, the High Court of Australia handed down its much-anticipated decision in Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788.
At its heart lies a case about an insurer who, in the face of non-disclosure, granted indemnity but twelve months later invoked the non-disclosure to reduce the scope of the grant.
The Federal Court of Australia held the insurer to its original decision. A majority of the High Court allowed the insurer’s appeal. The debate before the High Court broadly focused upon two issues:
· Did the insurer’s original decision to grant indemnity constitute an irrevocable waiver of its rights under the Policy;
· Did the insurer’s revocation of its original decision constitute a breach by the insurer of its duty of utmost good faith to the insured.
Its focus is instructive on the impact which an insurer’s decision to change its mind can have on the relationship between an insurer and insured.
Whenever a debate about the operation of a contract’s terms comes before the courts, there is frequently a tension within the judicial mind between the integrity of a contract’s terms and achieving a fair outcome. In leaning towards the former, the majority of the High Court observed in this particular case that:
‘Perhaps more accurately, the legal position is that although a waiver does have legal effect in that "the waiver is binding on the waiving party, unless the waiver is effectively retracted", the waiver can generally be revoked at any time with reasonable notice’.
There are established exceptions to that ‘legal position’ but the majority was not prepared to recognise as one of those exceptions merely taking a course of action that is inconsistent with a right under the contract. It involves more. As the majority firmly expressed:
‘In any event, (the insured’s) submission, and the approach of the majority of the Full Court – that taking a course of action that is inconsistent with a right can extinguish the right – is in direct conflict with long‑standing authority that requires the completed exercise of a power to extinguish rights or full satisfaction of alternative rights before a right or set of rights is extinguished’.
While it may have been expressed more plainly, it is hard to ignore an underlying theme that the notion of waiver (in whatever form or forms it might be presented – election, affirmation or estoppel) requires evidence that concrete steps have been taken which the revocation of the waiver cannot retrace or retrace without causing damage.
It is here that the line between ‘contract integrity’ and ‘fairness in the circumstances’, is drawn.
Duty of Utmost Good Faith
The majority of the High Court was unconvinced that the insurer had in fact resiled from its earlier decision.
But beyond that question lies the deeper question of the nature and content of the duty of utmost good faith. Importantly the majority observed that it is not a stand-alone obligation. It is a duty which is the foundation for the implication into a contract of other duties or, more relevantly in this matter, informs how the existing duties are to be undertaken.
In the latter sense ‘the duty of utmost good faith, as an implied condition, requires each party "to have regard to more than its own interests when exercising its rights and powers under the contract of insurance".
The majority did not accept that in that sense, the insurer had breached its duty. Even so its observations about that duty’s content offer useful guidance to parties wrestling with notions that in one way or another the duty has been breached.
Quantifying the Loss
Catlin Australia Pty Ltd v Diamond World Jewellers Pty Ltd  concerned a claim arising out of the theft of jewellery.
In dismissing the insurer’s appeal against the quantification of the claim, the New South Wales Court of Appeal unanimously held that the terms of the relevant policy rather than the insurer, dictated how the loss payable under the policy was to be determined.
As a secondary issue (but reflecting the themes of what the High Court said in Delor Vue) the Court found that the insurer had acted unreasonably in not paying so much of the claim that had been admitted.
Allegations of fraud invariably present challenges.
Admiral International Pty Ltd v Insurance Australia Ltd concerned a claim arising out of damage to property deliberately set on fire.
In allowing the appeal the New South Wales Court of Appeal concluded that the insurer had failed to link the setting of the fire to the insured or that the insured had implemented reasonable precautions against the fire occurring.
Again, picking up the themes of Delor Vue, the Court of Appeal concluded that the insurer’s decision to deny indemnity was not in itself a breach if the insurer’s duty of utmost good faith.
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