In this edition, we highlight two recent Court decisions and one recent AFCA determination which all relate to the issue of policy coverage.
Insofar as policy coverage generally is concerned, there are many facets which require careful consideration. Such facets include, but are not limited to, the questions asked by an Insurer of a Customer before the risk is purchased, the Customer’s answers to the Insurer in order to become an Insured, the manner in which an Insurer handles a claim (should a claim arise) and the manner in which the Insured should conduct him/herself during the claim process.
The three summaries below pertain to the abovementioned aspects.
Your claim may be covered … or not
Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38
Background
In March 2017, Delor Vue was damaged by a cyclone. The premises were insured by Allianz.
Allianz advised Delor Vue the claim would be honoured only for resultant damage, and the policy would not cover repairs to defective material and construction of the roof.
Allianz engaged experts regarding the repair works and paid $192,472 for temporary repairs, loss of rent, alternative accommodation expenses and engineer’s fees.
Allianz subsequently clarified the indemnity position by advising resultant damage was covered but not pre-existing defects. Allianz then advised if the offer was not accepted by Delor Vue within 21 days, Allianz reserved its rights to reduce the claim to nil relying on non-disclosure and alleged misrepresentation by Delor Vue.
Issues in Dispute
Delor Vue commenced proceedings in the Federal Court seeking to hold Allianz to cover under the policy terms due to election, waiver, estoppel and the duty of utmost good faith.
Courts’ Decisions
The primary Judge found Allianz’s communication contained a clear representation or promise that cover was confirmed and Allianz was estopped from relying on section 28(3) Insurance Contracts Act (ICA). In addition, Allianz “waived” the benefit of section 28(3) ICA and breached its duty of good faith.
The majority of the Full Court found no error in the primary judge’s findings.
The High Court allowed the appeal. The majority concluded:
- Delor Vue did not establish it had suffered a detriment in reliance on Allianz’s representation such that Allianz was estopped from revoking its waiver.
- Allianz’s change of position, and altered communication, was permissible because, in the law of contract, there are limited circumstances in which a gratuitous waiver of rights is irrevocable – none of which were present in these proceedings.
- The waiver of the s.28(3) ICA defence did not involve an election between alternative and inconsistent sets of rights, such as to give rise to an irrevocable “election by affirmation”.
- There appears to be no obligation upon an insurer, independent of its contractual obligations, to act in a manner which is “decent and fair”. Thus, there was no basis to find that Allianz breached its duty of utmost good faith.
Policy Coverage Takeaway
This decision confirms earlier decisions which reinforce the fact that an insurer may avoid liability for a claim under a policy of insurance if a customer fails to comply with the duty of disclosure.
Furthermore, the decision highlights that insurers may be bound by the terms and conditions of the policy due to that insurer’s conduct, representations and promises once a claim is submitted.
Finally, the authority is a timely reminder for insurers, and the advisors acting for them, to carefully make decisions as to policy coverage before steps are taken and representations are made to a customer.
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Too Hot to Handle
Ritchie v Insurance Australia Ltd [2022] NSWCA 278
Background
Employees of Advanced Plumbing & Drains Pty Ltd (in liq) (APD) were installing reinforcing steel into trenches, and were using a cutter fitted with a cutting blade to cut reinforcing steel. This produced sparks and the sparks resulted in a bushfire.
The applicant commenced proceedings for herself and on behalf of group members who suffered loss or damage as a result of that bushfire.
APD went into liquidation, so the applicant was granted leave to proceed directly against PD’s insurer, CGU.
CGU’s policy contained a Welding Endorsement. That endorsement provided cover would not extend to liability arising out of or in any way connected with listed activities, including the use of “spark producing equipment”, unless the activity was conducted in strict compliance with Australian Standard AS 1674, Part 1 – 1997 ‘Safety in Welding and Allied Processes – Fire Precautions’.
Courts’ Decisions
The primary judge held the exception was engaged.
The NSWCA dismissed the appeal because the commercial object of the endorsement in the policy was to exclude cover for listed activities which carried a risk of fire unless they were carried out in compliance with the Standard.
The construction was congruent with the requirement for strict compliance with the Standard. The definition of “Hot work” in the Standard was apt to capture grinding, welding and other “heat-producing or spark-producing operations”, irrespective of the way in which or when in the relevant process sparks were produced.
Commercial Considerations
The application of a policy will largely be underpinned by the commercial intent of the policy of insurance, especially exclusions and endorsements.
Therefore, when purchasing insurance cover, an Insured must be mindful of the risks its business activities pose to the Insurer. Similarly, an insurer is entitled to exclude a claim if the purchased risk was one which was never intended to be accepted by the Insurer.
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Spoke too late
AFCA Determination Case number 863855 / Financial Firm AAI Limited
Background
A farmer added his farm to his business insurance policy with Suncorp on 20 December 2019. Suncorp agreed to backdate cover to 19 October 2019, when the policy was issued.
On 4 June 2020, the farmer lodged a claim with Suncorp for property damage and a loss of earnings after a fire at the farm.
Suncorp declined the claim, saying the farmer failed to inform Suncorp that the farm suffered damage from a bushfire on 4 December 2019. Suncorp said it would not have offered policy terms if it had been aware of the farm’s pre-existing condition.
Issues in Dispute
The farmer maintained the claim should have been accepted, saying he did not know the fire damaged the farm when it was added to the policy. Unfortunately for the farmer, Suncorp located Facebook posts made by the farmer in December 2019 where he stated things like “We probably lost the farm today …” due to the fires.
AFCA’s Determination
AFCA noted the farmer had not informed his broker about the fire because the farmer was under the impression the policy had already been enacted.
“Regardless of the reason why this was not communicated to his broker, it does not change that there has been a breach of the complainant’s duty of disclosure when applying for the insurance policy,” AFCA said.
AFCA determined Suncorp would not have covered the property if it had been aware of the damage and entitled it to reduce the liability to nil.
Takeaway Points
An insurer has remedies available to it if and when a customer fails to comply with the duty of disclosure.
If you have any queries or would like further information regarding these commentaries, please contact:
David Giacomantonio
Consultant
M: 0418 154 138
E: dgiacomantonio@pageseager.com.au
