Section 28(3) of the Insurance Contracts Act 1984 (Cth) (“the Act”) provides that an insurer may reduce the amount it pays in response to a claim if there has been a misrepresentation or non-disclosure by the insured. However, there are circumstances where an insurer may be prevented from relying on that section.

This issue was explored in Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 (No 2) [2021] FCAFC 145.

Factual Background

CTS 39788 (“Body Corporate”) was the Body Corporate for an apartment block in North Queensland. The Body Corporate had identified structural defects in the apartment block. The defects were attributed to defective roof framing, which had not been compliant with manufacturer installation standards.

In around March 2017, during Cyclone Debbie, damage was caused to the roof of the apartment block.

Prior to the cyclone, the Body Corporate took out a policy with Allianz for public liability and property damage. The Body Corporate had disclosed to Allianz that there were defects in the apartment block, but failed to specifically disclosure the existence of the defects in the roof.

As a result of the damage caused by Cyclone Debbie, the Body Corporate made a claim under the Allianz policy.

Allianz advised the Body Corporate that ‘despite the non-disclosure issue’ it would honour the claim and indemnify the Body Corporate for and against the damage to the roof.

However, Allianz subsequently sought to reduce its liability to $0 pursuant to Section 28(3) of the Act and said that had it been aware of the structural defects in the roof it would not have extended cover to the Body Corporate.

The Body Corporate commenced proceedings against Allianz in the Federal Court of Australia.

In the Federal Court, Allianz was able to establish that there was a non-disclosure by the Body Corporate that entitled Allianz to invoke Section 28(3) of the Act. However, the Federal Court found that Allianz  was estopped from relying on Section 28(3) of the Act because it had initially elected not to exercise its rights in relation to the Body Corporate’s non-disclosure.

Allianz appealed to the Full Court of the Federal Court of Australia.

Issues for consideration on appeal

Allianz’s appeal raised the following questions:

  1. Can an election made by an insurer restrict its ability to rely on Section 28(3) of the Act?
  2. Did Allianz’s previous comments to honour the claim despite the non-disclosure issue prevent it from waiving its rights to deny the claim.

Decision

The Full Court of the Federal Court held that Allianz could not rely on Section 28(3) of the Act. The Body Corporate had initially disclosed certain information to Allianz but omitted specific disclosure of structural damage to roof trusses. The Court did not find this to be a breach of the duty of utmost good faith and said that the insurer could have initially relied on Section 28(3) of the Act when the information had first been disclosed to Allianz by the Body Corporate.

The Court ultimately said that it was unfair for Allianz to change its position. The Body Corporate made decisions in reliance of Allianz’s comments to honour the claim and such comments waived any rights of Allianz to limit its liability under Section 28(3) of the Act.

Implication of this Decision

This decision shows how important it is for an insured to comply with its duties of disclosure. Failure to disclose relevant information to an insurer may result is severe consequences such as the denial of a claim. Notwithstanding this clear requirement, it is important to carefully review a decision made by an insurer and ensure that the insurer does not absolve itself from prior representations or promises made to an insured.