Contract law update 2022: waiver

Allianz insured Delor Vue, a body corporate for a number of apartment buildings in North Queensland, under a composite policy of insurance. Several of those buildings were damaged by Tropical Cyclone Debbie on 28 March 2017.

The cyclone exposed the existence of pre-existing defects in the apartment buildings, which Delor had not disclosed when taking out the policy. That non-disclosure entitled Allianz to avoid liability under the insurance contract, under ICA s28(3). Section 28(3) provides a statutory defence that allows an insurer to reduce its liability to pay claims where there has been non-disclosure or misrepresentation by the insured. Delor made a claim for cyclone damage. Allianz, through its agent, made a gratuitous offer by email to honour the claim and provide indemnity over certain categories of damage, '[d]espite the non-disclosure issue'. However, the scope of the damage for which Allianz had undertaken to arrange repairs was unclear.

Over the course of the next year, after more pre-existing defects in the construction of the building became apparent, a dispute arose as to the repairs. In the course of that dispute, Allianz proposed an offer of 'settlement', open for 21 days, under which:

• Allianz would pay for certain repairs arising from the cyclone damage, and some other limited damage arising from the pre-existing defects (notwithstanding Delor's non-disclosure); but
• if Delor did not agree to Allianz's terms within 21 days (later extended to more than three months), Allianz would rely on its defence under s28(3) to reduce Delor's insurance claim to nil, and therefore not pay anything, due to Delor's non-disclosure.

Delor did not accept the terms. After Allianz asserted that its liability had been reduced to nil, Delor brought proceedings in the Federal Court, attempting to prevent Allianz from retracting its earlier offer.

At trial, Delor argued that the insurer was bound by its earlier representation that it would grant indemnity. There were four main arguments:

• Waiver: Had Allianz waived its right to rely on the s28(3) defence by making its gratuitous offer to provide indemnity notwithstanding the non-disclosure?
• Election: Had Allianz irrevocably elected not to exercise its power to rely on the defence?
• Estoppel: Was Allianz estopped from resiling from its representation that it would provide indemnity?
• Good faith: Had Allianz failed to comply with its duty to act with utmost good faith?

Delor was successful at first instance before Chief Justice Allsop on the waiver, estoppel and good faith issues. Delor was successful again on appeal to the Full Court of the Federal Court of Appeal, with a majority (Justices McKerracher and Colvin; Justice Derrington dissenting) finding for Delor on all four issues. Allianz appealed to the High Court.

The High Court upheld Allianz's appeal. The majority (Chief Justice Kiefel, Justices Edelman, Steward and Gleeson; Justice Gageler dissenting) found for Allianz on all four issues, with the effect that Allianz could rely on s28(3) to deny indemnity. The majority's reasoning, which generally rejected more expansive legal conceptions of the four issues, provides useful guidance on each point:

• Waiver. A waiver of a right, such as Allianz's right under s28(3), is 'rarely irrevocable'. With some exceptions, there are only 'exceptional' circumstances in which a waiver cannot be revoked, which did not apply to the present case. Assuming that Allianz had waived its defence under s28(3) in making its initial offer to provide indemnity, it revoked its waiver to the extent that it subsequently made that waiver (and therefore its offer to indemnify Delor) conditional on Delor's acceptance of the settlement terms.
• Election. The common law doctrine of election did not apply to Allianz's decision to waive reliance on the s28(3) defence and offer indemnity. There was no 'election' by Allianz between alternative and inconsistent sets of rights: with or without the waiver, the insurance contract remained on foot, and reliance on the s28(3) defence would not be immediately inconsistent with any of the parties' rights under the contract.
• Estoppel. Promissory estoppel also did not apply, as Delor did not suffer any detriment from relying on Allianz's promise to indemnify the property defects. Delor failed to show that it would either have obtained a more favourable settlement than Allianz's settlement offer, or that it would otherwise have taken steps to carry out repair work itself – meaning that Allianz was not estopped from revoking its offer. Insurers should be aware that they still may be estopped from resiling from offers to grant indemnity if doing so will cause detriment to the insured – such as by preventing the insured from resolving the conflict, or from taking steps to resolve the issue itself.
• Good faith. In providing useful commentary on the nature of the duty of utmost good faith (a centuries-old common law duty now embodied in ICA s13(1)), the majority found that this duty did not extend so far as to prevent Allianz from departing from its earlier offer to indemnify Delor. The court found that there is no 'free-standing obligation' on insurers to act in a manner that is 'decent and fair'. The content of the duty of utmost good faith (which applies to both insurers and insureds) is for rights and powers to be exercised and duties to be performed consistently with commercial standards of decency and fairness. While that has particular recognised aspects in insurance contracts (such as establishing a duty of full disclosure), it does not extend so far as a duty for insurers and insureds never to depart from representations made to each other.
• The majority also rejected a further argument that Allianz's unilateral waiver of the s28(3) defence had become irrevocable and that the defence was thus 'extinguished', finding that this argument (which had been accepted by the approach of the majority of the Full Court) would have amounted to a 'vast expansion' of the doctrine of extinguishment.

In dissent, Justice Gageler agreed with the majority judgment from the Full Court, and would have found for Delor on each issue. His Honour's judgment preferred a broader approach to the concept of election, which would have held that Allianz had waived its right to rely on the s28(3) defence; found that Delor had in fact relied on Allianz's promise of repair to the detriment of its ability to pursue opportunities to repair the properties; and found that Allianz was bound by the requirement of utmost good faith not to depart from its original offer – saying that Allianz was 'not entitled to blow hot and cold'. His Honour's comments that Allianz had acted in an 'oppressive and unbusinesslike' way by doing so (and reasserting its right to rely on the s28(3) defence) are particularly noteworthy and likely to attract further comment. Justice Gageler dissent still serves as a cautionary tale for insurers. Noting his Honour's comments that Allianz would be acting in an 'oppressive' and 'unbusinesslike' fashion by going back on its earlier offer after a year had passed, insurers and their agents should consider expressly reserving their rights to avoid an insurance claim under ICA s28(3) when making gratuitous offers to indemnify insureds notwithstanding any non-disclosure.