Case Note – The High Court’s Vue on Contracts of Insurance and the Duty of Utmost Good Faith

09 January 2023

Name of case:

Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 [2022] HCA 38.

Topic of case:

Insurance – Dispute regarding extent of indemnity offered by Insurer to Insured – Insurer proposed to settle dispute or otherwise rely on section 28(3) of Insurance Contracts Act 1984 (Cth) (the Act) – Whether Insurer bound due to waiver, election by affirmation, or estoppel – Whether Insurer breached duty of utmost good faith.

1. Key learnings

1.1 The Scope of the Duty of Utmost Good Faith:

The duty of utmost good faith will not displace the requirements of general contractual principles such as waiver, election by affirmation, or estoppel.

1.2 Representations about a Claim vs Representations about a Policy:

If an insurer determines not to avoid a policy despite knowing that the insured made a misrepresentation and/or breached the duty of disclosure, the insurer will likely be prevented from resiling from its position.

However, the insurer may be able to change its position as to whether it will exercise its rights under a policy, including a statutory defence under section 28(3) of the Act.

2. Facts

2.1 Delor Vue Apartments CTS 39788 (Delor Vue) was the body corporate for a complex of apartment buildings in Cannonvale in northern Queensland (the Premises).

2.2 Delor Vue lodged a claim under a policy of public liability and property damage insurance issued by Allianz Australia Insurance Ltd (Allianz) for property damage to the Premises sustained due to Cyclone Debbie in March 2017 (the Claim).

2.3 After a preliminary inspection of the Premises and review of the documents lodged in support of the Claim, Allianz learned that the Premises had serious non-structural defects which Delor Vue knew of, but did not disclose, before entering into a policy with Allianz. Nonetheless, Allianz sent an email to Delor Vue dated 9 May 2017 in which it stated as follows:

(a) ‘Despite the non-disclosure issue which is present, [Allianz] is pleased to confirm that we will honour the claim and provide indemnity to [Delor Vue], in line with all other relevant policy terms, conditions and exclusions’; and
(b) Allianz would cover repair costs associated with damage to the Premises caused by Cyclone Debbie but not damage due to defective materials and construction.

2.4 In assessing the Premises, Allianz discovered additional defects in the Premises. Allianz’s loss adjusters quantified the cost of repairing or replacing the pre-existing defects at approximately $3.6 million. Allianz and Delor Vue could not agree on the sequence of work and the costs to be incurred by each party in the Claim.

2.5 On or about 28 May 2018, Allianz responded to a complaint by Delor Vue regarding the handling of the Claim by:

(a) ‘Offering to settle’ the dispute between Allianz and Delor Vue by agreeing to cash settle the cost of some, but not all, of the repairs to be incurred to rectify the Premises; and
(b) Stating that if Delor Vue did not agree to Allianz’s ‘offer’, Allianz would rely on section 28(3) of the Act to reduce its liability to Nil.

2.6 After Delor Vue rejected Allianz’s ‘offer’, Allianz sought to reduce its liability for the Claim to Nil under section 28(3) of the Act.

2.7 Delor Vue commenced proceedings in the Federal Court claiming that Allianz could not exercise a remedy under section 28(3) of the Act because of waiver, election by affirmation, estoppel, and the duty of utmost good faith. Both the trial judge and the majority of the Full Court agreed that Allianz was bound by its representation in the May 2017 email that it would extend indemnity for the Claim.

3. Decision


3.1 The majority (- Kiefel CJ, Edelman, Steward, and Gleeson JJ) held that a unilateral waiver could be revoked at any time with reasonable prior notice unless there were exceptional circumstances. The majority considered that to hold otherwise would undermine other contractual rules, such as requiring variations of contracts to be for consideration.

3.2 The majority held that after Allianz’s ‘offer to settle’ had been rejected, Allianz had revoked its waiver.

Election by Affirmation

3.3 The majority restated that the ‘modern approach’ to election by affirmation was that if a party to a contract has two sets of rights that could not exist simultaneously, ‘… “the mere fact of intimating [a] choice” in relation to these alternative rights makes it “inevitable, or necessary in the interests of justice, that the choice, when once made, should be irrevocable’: [51].
3.4 The majority considered that Allianz’s decision to exercise a remedy under section 28(3) of the Act was a statutory defence which did not involve ‘… alternative and inconsistent sets of rights (or even an immediate inconsistency between continuing legal positions)…’. The majority distinguished Allianz’s decision to exercise a remedy under section 28(3) with an insurer’s decision to avoid a contract of insurance under section 28(2). The majority considered that an insurer who could, but chose not to, exercise a remedy under section 28(2) had elected to affirm the relevant contract of insurance.

Irrevocable Waiver by Estoppel

3.5 The majority held that Delor Vue had not established that it had suffered detriment due to Allianz exercising a remedy under section 28(3) of the Act.

The Duty of Utmost Good Faith

3.6 The majority restated that the duty of utmost good faith operated ‘symmetrically’ on both the insurer and the insured and that:

‘It has therefore been said that rights and powers must be exercised, and duties must be performed, “consistently with commercial standards of decency and fairness” as distinct from standards of decency and fairness more generally’: at [96].

3.7 The majority rejected the proposition that the duty of utmost good faith required a party to never depart from earlier representations without a reasonable basis because:

(a) ‘[It] would have the effect of subsuming much of the operation of the doctrines of election, waiver, and estoppel into a broader positive duty… No reliance or detriment would be required’; and
(b) Given that the duty of utmost good faith applies equally to an insured, it could result in an insured being prevented from departing from representations he or she had made to the insurer.

Dissenting Judgment

3.8 In a dissenting judgment, Gageler J determined that Allianz was prevented by waiver, election by affirmation, estoppel, and the duty of utmost good faith from relying on section 28(3) of the Act in the Claim.

3.9 The crux of his Honour’s dissent was his Honour’s view that Allianz should not be entitled to resile from a position it communicated unequivocally and with knowledge that Delor Vue did not comply with its duty of disclosure.

For further information, please contact the authors.

This article was written by Nicholas Matkovich, Partner and Vignesh Iyer, Associate.

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