The “duty of the utmost good faith” (duty) is a principle that automatically applies to a contract for insurance. The duty is mandated under the Insurance Contracts Act 1984 (Cth) (Act).
It works on the principle that both the insured and the insurer, must act towards the other party in respect of any matter arising under or in relation to the contract of insurance, with the utmost good faith.
The key here, is that the duty is not a one-way obligation. For an insured person (or company), it’s crucial that the disclosures you make to the insurer are true and accurate, and that you read the product disclosure statement (PDS) provided by the insurer carefully.
The duty applies throughout the period of an insurance policy.
A recent case in the High Court has scrutinised whether an insurer is allowed to change their mind and, if they do, whether it is a breach of the duty. That case relates to an insurer defending a payout despite previously agreeing to cover the loss and damage.
Allianz Australia Insurance Ltd v Delor Vue Apartments[1]
In December 2022, the High Court handed down its decision in Allianz Australia Insurance Ltd v Delor Vue Apartments [2022] HCA 38 (Allianz v Delor Vue). On appeal from the Federal Court of Australia, the High Court considered whether an insurer could rely on a statutory defence to a claim despite a representation that the insurer would grant indemnity.
Delor Vue Apartments (Delor Vue), a body corporate for an apartment complex in Cannonvale in North Queensland, took out an insurance policy with Allianz Australia Insurance Ltd (Allianz) for public liability and product liability cover. On 28 March 2017, North Queensland was hit by Tropical Cyclone Debbie, which affected Delor Vue’s apartment complex. The apartment complex sustained significant damage and exposed defects of the apartment building. Delor Vue Apartments filed a claim with Allianz to indemnify the loss and damage. During the claims assessment process by Allianz, they discovered that the building defects were not disclosed by Delor Vue when the insurance contract was taken out. Despite this, Allianz accepted the claim, however they would not provide indemnity to repair the defects.
The parties disputed the sequence of repair work and the distribution of costs, resulting in Allianz proposing a full and final settlement. Unless Delor Vue Apartments agreed to the proposed terms within the 21-days, Allianz would exercise its power under section 28(3) of the Act to reduce its liability on the basis that Delor Vue Apartment failed to disclose the pre-existing building defects. Section 28 of the Act provides that if a relevant failure occurs in relation to a contract for general insurance, but it does not apply if the insurer would have entered into the contract, for the same premium and on the same terms and conditions. Section 28(3) of the Act gives an insurer the right to reduce its liability for a claim to the amount had it not been for the relevant failure by the insured.
Delor Vue rejected the offer, and in turn, Allianz refused to cover any loss or damage. Delor Vue issued proceedings in the Federal Court of Australia, claiming that Allianz had made a representation that it would grant indemnity for the claim. At first instance, the Federal Court found in favour of Delor Vue, in deciding that Allianz was prevented from resiling from its decision to grant indemnity to Delor Vue. More specifically, Delor Vue made the following arguments:
- Allianz had irrevocably elected not to rely on section 28(3) of the Act, by agreeing to indemnify the loss on first instance;
- Allianz waived its rights to rely on this defence;
- Allianz was estopped from resiling from its representation that it would grant indemnity despite the non-discloser; and
- Allianz had breached its duty of utmost good faith.
The primary judge upheld the claims in (b)-(d) above. Allianz appealed to the Full Federal Court, which was unsuccessful, prompting an appeal to the High Court.
The High Court overruled the decision by the Federal Court and allowed the appeal, 4:1. The High Court found that Allianz had effectively revoked its waiver and validly exercised its right under the Act. The High Court determined that the conduct of Allianz did not amount to a breach of the duty of utmost good faith.
Going Forward
The High Court decision in Allianz v Delor Vue is significant for many reasons:
- It sets a precedent that an insurer’s decision to accept an indemnity, does not necessarily mean that it is a full and final promise to indemnify the loss or damage in full.
- A representation by the insurer may still be subject to a full and final settlement of the claim.
- It’s a stark reminder for those making a claim that they must make accurate disclosures when taking out insurance.
If you would like assistance with a dispute regarding an insurance policy or claim, please contact one of our experienced insurance dispute lawyers at Taurus Legal Management on (03) 9481 2000 or info@tauruslawyers.com.au.
[1] CTS 39788 [2022] HCA 38