Key Takeaways

Section 28(3) of the Insurance Contracts Act (the Act) provides grounds for an insurer to reduce payment of a claim commensurate to the level of exposure that the insurer would have had if the misrepresentation or non-disclosure had not occurred. An insurer may reduce its liability for a claim to nil where it is able to show that but for the misrepresentation / non-disclosure the insurer would not have provided cover at all.

However, an insurer must approach s28(3) cautiously and ensure that it communicates with the insured after due deliberation and in a timely and unambiguous way.

An insurer seeking to change its position with respect to its rights under s28(3) may be estopped from doing so, or found to have elected against that course, or to have waived its right to pursue that course. An insurer’s conduct in seeking to change its position may also attract a finding that it has breached its duty of utmost good faith.

Brief Facts

CTS 39788 (CTS) is the body corporate for a large apartment block in North Queensland which was first occupied in 2009. By late 2014, CTS had identified a number of construction defects, including soffit sheeting on the eaves being susceptible to detachment in high winds. This issue was attributed to the inferior construction of the roof framing by engineers CTS appointed in December 2016 (the spacing of the soffit lining did not meet the manufacturer’s installation recommendations).

On 28 March 2017, water ingress during Cyclone Debbie caused damage and the roofs were further damaged by the force of the cyclone.

Just before the cyclone, CTS took out a policy of insurance for both public liability and property damage. In doing so, CTS did not disclose the existence of the engineering report or the defects to the insurer (‘the non-disclosure’).

The insurer then became aware of the non-disclosure following claim lodgement. It responded to the non-disclosure at that time by email, acknowledging the non-disclosure and agreeing to accept the claim and pay for resultant damage (but not for the defective materials and construction of the roof). The email then set out a process by which repairs would be undertaken.

The relationship between CTS and the insurer became strained. The insurer issued a letter with an offer to conduct the repairs for the resultant damage, only if CTS first proceeded to effect the repairs relating to the defective workmanship / construction. The insurer stated that if this did not occur, it would withdraw indemnity based on the non-disclosure and seek to reduce its liability to nil pursuant to s28(3) of the Act. It came to the attention of the court at trial that this decision was against the advice of a senior underwriter.

CTS refused the proposal and as a consequence coverage was denied in a letter from the insurer's solicitors in August 2018.

CTS commenced proceedings against Allianz, relying on the doctrine of election, estoppel, waiver and the breach of the duty of utmost good faith.

The insurer was able to establish at the trial that there was a non-disclosure entitling it to invoke s28(3) but it was nevertheless unsuccessful. The trial Court found that it was estopped from asserting a reliance upon s28(3), that it had made an election to not exercise any rights arising from the non-disclosure and that it had waived its right to do so. The Court also determined that the insurer’s attempt to resile from its earlier position was a breach of the duty of utmost good faith.

Appeal Judgment

The insurer appealed and lost again. In determining the appeal the FCA needed to consider these questions:

1. Does the doctrine of election apply to the operation of s28(3)?
2. Did the insurer’s conduct of asserting that it would honour the claim despite its knowledge of the earlier non-disclosure prevent it from later resiling from this position or otherwise amount to a waiver of its rights?
3. Did the insurer’s actions in seeking to resile from its initial representation that it would indemnify amount to a breach of the duty of utmost good faith?

Election

The insurer argued that the common law doctrine of election did not apply on the basis that s28(3) did not confer a choice. The Court disagreed and ruled that the doctrine of election does apply in circumstances where an insurer is required to make a decision between two inconsistent positions.

Estoppel

The insurer argued that CTS had not shown any positive detriment or established any counterfactual scenario to suggest that it was worse off because of the insurer’s representation. The Court rejected this position, ruling that a counterfactual need not be presented and that the nature of the reliance may itself manifest the necessary detriment. The Court referred in this respect to the loss of opportunity and the passage of time before the assertion of a right to withdraw indemnity.

Breach of Duty of Utmost Good faith

The insurer argued on appeal that its purported reliance on s28(3) of the Act could not be characterised as a breach of the duty of utmost good faith because of the finding that s28(3) could have been invoked initially. Not surprisingly, the Court upheld the finding of the trial judge, ruling that the relevant conduct was that involving the later denial of liability in August 2018 and that it was wrong to evaluate the conduct of the insurer with hindsight in any event.

Implications

The case serves to highlight the difficulties that an insurer will face if it decides (on commercial grounds or otherwise) to indemnify in full knowledge of circumstances that might allow it to either deny indemnity or reduce liability and later seeks to resile from its decision. Unless the insurer can reference new information that has come to light which would have had a bearing on its initial decision or otherwise distinguish the terms of the original offer to indemnify as being ‘conditional’ only, an insurer is unlikely to be successful in defending its position.

Where insurers do nevertheless seek to change position with respect to indemnity, they should do so promptly and ensure that the communication to the insured does not leave the insured with no options of recourse if breach of the duty of utmost good faith is to be avoided.