In Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38, a majority of the High Court of Australia (Kiefel CJ, Edelman, Steward and Gleeson JJ, Gageler J dissenting) found that an insurer was not bound by its gratuitous representation that it would not rely on a defence arising from the insured’s innocent non-disclosure to reduce its liability. In overturning the decision of the Full Federal Court (which had affirmed the decision at first instance), the High Court provided important clarity on the taxonomy and conceptual boundaries of the legal doctrines of election and waiver, as well as offering new guidance on the content and operation of the duty of utmost good faith in insurance law.

Background

The respondent (Delor Vue) was the body corporate for an apartment complex in North Queensland, in respect of which it held a public liability and property damage policy underwritten by the appellant (Allianz). In March 2017, Delor Vue notified a claim on the policy for significant property damage caused by Cyclone Debbie. At the time of entering into the policy, Delor Vue was aware of certain defects in the complex, which it failed to disclose to Allianz. On 9 May 2017, after disclosure of all relevant documents and a preliminary investigation, a representative of Allianz’s underwriting agency, Strata Company Insurance (SCI) wrote:

Despite the non-disclosure issue which is present, [SCI] 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 (the 9 May Email).

Where an insured has breached its duty of disclosure, s 28(3) of the Insurance Contracts Act 1984 (Cth) (ICA) entitles an insurer to reduce its liability to the extent prejudiced by the breach (the Non-disclosure Defence). It was established at first instance, and unchallenged on appeal, that, subject to any claim arising from the 9 May Email, Allianz would have been entitled to rely on s 28(3) of the ICA to reduce its liability to nil.¹ In the 9 May Email, SCI set out two categories of damage: one for which Delor Vue would bear responsibility and one which Allianz would cover. The High Court noted that the scope of the second category was unclear. Over the course of the next year, Allianz proceeded to assert its contractual rights in respect of the claim (including to take subrogated action against the builder, to access the property and to control repair work) but a dispute arose as to the sequence of the works and the scope of the categories of damage.

On 28 May 2018, Allianz wrote to Delor Vue proposing a ‘settlement’ under which it valued repairs for each of the categories and stated that, if its terms were not accepted, it would rely on the Non-disclosure Defence and its offer in relation to indemnity would lapse. Delor Vue brought proceedings against Allianz in the Federal Court of Australia alleging that Allianz was bound by its representation in the 9 May Email that it would not rely on the Non-disclosure Defence. Delor Vue’s claim was based alternately on the principles of waiver, election, estoppel and/or breach of the duty of utmost good faith set out in s 13 of the ICA. Delor Vue was successful at first instance (before Allsop CJ) on all grounds except election and on appeal to the Full Federal Court (McKerracher and Colvin JJ, Derrington J dissenting) on all grounds. Allianz appealed to the High Court, which, by majority, upheld the appeal.

Election and waiver

The majority of the High Court emphasised that the circumstances in which a gratuitous and unilateral ‘waiver’ of contractual rights cannot be revoked are rare and exceptional. Were this not the case, contractual rules and formalities regarding variation of contract would be undermined. Putting aside estoppel, the majority outlined two 'exceptional' circumstances in the law of contract in which a ‘waiver’ (used in its broad sense) cannot be revoked: election by affirmation and extinguishment of rights. First, a party may affirm the existence of certain contractual rights and thereby ‘waive’ inconsistent sets of rights.

The majority preferred to describe this doctrine as ‘election by affirmation’, rather than in terms of waiver.

Historically, the doctrine applied where a party failed to perform a condition precedent and the opposing party could affirm the contract by performing the corresponding obligation. The majority queried ‘whether this historical approach of liberal recognition of irrevocable affirmation following failure of any condition precedent should apply generally today, other than where it has been impliedly preserved by statute’ (at [46]), observing that it was ‘strongly arguable’ a party’s decision to affirm its obligations in such circumstances would only be irrevocable after detrimental reliance (at [47]). Nevertheless, the majority held that s 28(3) of the ICA operates only as a defence and not as a condition precedent to counter-performance and, as such, the exception was not enlivened (at [55]).

Under the ‘modern approach’ to election by affirmation, the majority held that the election may only be irrevocable where it (1) keeps extant a set of contractual rights that cannot be enjoyed without the extinction of another; and (2) is made with knowledge of the circumstances giving rise to the inconsistent set of rights (at [50]). Even in its modern form, the majority still had difficulties justifying the existence of the doctrine but accepted that it may be ‘too large [a step] for the common law now to take’ to subsume the doctrine of election within that of estoppel (at [53]). On this approach, it found that the decision by Allianz to waive the Non-disclosure Defence did not involve an election between inconsistent rights or positions: ‘With or without waiver, the insurance contract remains on foot and reliance on the defence under s 28(3) is not immediately inconsistent with any of the contractual rights’ (at [56]). Notably, this was contrasted with the position of an insurer who waives its right to avoid the contract for fraudulent non-disclosure under s 28(2) of the ICA.

The second exception to the revocability of contractual waiver was described by the majority as ‘extinguishment of rights’. This may occur where a person completes the exercise of a legal power to extinguish a right or set of rights (e.g., where a party effectively terminates a contract so as to extinguish future contractual obligations) or by pursuing a course of action such that an alternative and inconsistent set of rights is fully satisfied (e.g., where a plaintiff elects between compensatory and restitutionary damages and one remedy is fully satisfied by entry of judgment). The majority held that it was not sufficient for a person to ‘merely tak[e] steps which clearly evidence a choice between two inconsistent courses of action’ (at [65]), nor, as previously found, were the contractual rights asserted by Allianz necessarily inconsistent with reliance on the Non-disclosure Defence – Allianz could not have been certain of the extent of its entitlement to reduce liability, which may have only extended to a partial reduction.

Accordingly, the majority found that Allianz’s waiver of the Non-disclosure Defence was not irrevocable and was revoked, in the sense that the continued operation of the waiver was made conditional upon acceptance of terms.

Gageler J, dissenting, preferred to view waiver as ‘a distinct doctrine’ which precludes exercise of an abandoned right in circumstances where the person has knowledge of the facts giving rise to the right and has unequivocally communicated their choice to abandon it (at [55], [57]). Gageler J held that such a doctrine was justified on the basis of fairness,² in the sense that ‘the person affected is entitled to know where he stands’ (at [151]). In the circumstances of this case, Allianz had knowledge of the facts giving rise to the Non-disclosure Defence and had unequivocally communicated its choice to abandon that defence in the 9 May Email.

Estoppel

Estoppel was alleged to be the third basis upon which Allianz’s waiver had become irrevocable. In this respect, the only issue in dispute in the High Court was whether Delor Vue had established any detriment. Delor Vue argued that it suffered detriment in the loss of two opportunities: first, the opportunity to compromise the dispute regarding the Non-disclosure Defence more favourably; and second, the opportunity to carry out the repair works itself.

While the majority accepted that detriment could be established by loss of opportunity, it found that Delor Vue had not led any evidence to suggest that the alleged opportunities had any real and substantial value. In respect of the first opportunity (which had not been pleaded in the concise statement) no evidence was called as to the relationship between the parties, Delor Vue’s appetite for litigation or any informal offers that were made to resolve the dispute before May 2018. In respect of the second opportunity, Delor Vue did not specify what additional action it might have taken, especially in circumstances where its available funds fell vastly short of the cost of repairs.

Gageler J found this approach to be ‘too granular’, with insufficient regard to the temporal dimension of Delor Vue’s reliance (at [165]). His Honour was satisfied that Delor Vue had, over a year long period, ‘refrained from pursuing opportunities for self-help which were obviously available to it’ (at [168]).

Duty of utmost good faith

Finally, Delor Vue argued that Allianz had breached its duty of utmost good faith under s 13 of the ICA in resiling from the 9 May Email. The majority noted that s 13 has two aspects: first, good faith is the principle upon which the insurance contract is ‘based’ and therefore requires various implied duties to be recognised; second, good faith conditions the exercise of existing rights, powers and duties arising under or in relation to the contract. The majority held that the duty is not a ‘ free-standing’ or ‘open-textured’ contractual obligation to act in accordance with commercial standards of decency and fairness, it must be given particularised content (at [97]).

The majority rejected the existence of an implied duty not to depart, without reasonable basis, from significant representations concerning a claim. This could not be justified either as a separate duty implied into the contract or a duty conditioning the exercise of the insurer’s obligation to make a timeous and clear decision. In either case, the majority reasoned, such a duty would ‘have the effect of subsuming much of the operation of the doctrines of election, waiver and estoppel into a broader positive duty’ (at [103]) and, since the duty applies equally to both parties, would ultimately operate to hamstring insureds in their representations in respect of a claim.³

Characterisation of the facts was also important in this case. The majority preferred to view the 9 May Email as an ambiguous offer of indemnity that was later clarified and given more precise content, rather than a considered position that was resiled from.

By contrast, Gageler J drew support from s 14 of the ICA, which states that reliance on a contractual right can breach the duty of good faith. His Honour reasoned that reliance on a statutory right, where it is ‘capricious or unreasonable when gauged by reference to the informing notions of fairness, reasonableness, and community standards of decency and fair dealing’ (at [174]) could equally breach the implied duty. BN

ENDNOTES

^{1 This is subject to the majority’s observation at [36] that reliance on s 28(3) of the ICA may require Allianz to refund Delor Vue the relevant premiums paid.}

^{2 By contrast, the majority expressly disavowed a doctrine of waiver founded upon ‘unfairness’ at [33].}

^{3 Notably, however, the example provided by the majority of an insured party making a representation ‘carelessly assuming that the damage was minimal’ (at [104]) would not necessarily breach the duty as articulated by the primary judge who emphasised that the breach involved resiling from a ‘considered position’ (Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd (No 2) (2020) 379 ALR 117 at 192-3, [346]-[347]).}