Tropical Cyclone Debbie raises the roof – or does she? A recap on building defects, non-disclosure, waiver and estoppel

Courts will always look to the equitable nature of dealings when determining the operation of an insurance contract.  This case note demonstrates how an insurer was later prevented from changing its position on indemnity when it was aware of, and specifically addressed, a non-disclosure on the part of the insured at the time of its initial granting indemnity.

 

Author: Viv Braithwaite
Judgment date: 6 May 2020
Citation: Delor Vue Apartments CTS v Allianz Australia Insurance Ltd (No 2) [2020] FCA 588
Jurisdiction: Federal

Principles


  • An insurer will be estopped from resiling from an original decision and seeking to rely on section 28(3) of the Insurance Contracts Act 1985 (Cth) to reduce its liability for a claim to nil in circumstances where it has expressly stated that non-disclosure issues will not affect policy response.
  • It is open to an insurer to rely on the non-disclosure of relevant information by an insured with respect to one section of cover, to reduce its liability with respect to a claim under a different section of cover if, prior to policy inception, the disclosure of that information would have resulted in the insurer not accepting that risk.

Background

The Applicant, Delor Vue Apartments CTS, is a body corporate for 62 apartments in Cannonvale, North Queensland. The apartment complex was built in 2008 and 2009 by a developer, Delorain Pty Ltd and a builder, Beachside Constructions (National) Pty Ltd (Beachside).

From at least 2014, reports obtained by the Applicant identified building issues associated with, amongst other things, the roofing of the apartment complex including defective soffit sheeting and eaves.

The Applicant was rightly concerned with the defects that had been identified by the numerous building consultants, with the body corporate minutes noting that the falling eaves presented a "serious Work Place Health and Safety issue due to potential injury to persons if a sheet falls".

The Applicant took steps to repair the defects and had issued demands to the Beachside, requesting that it return to inspect the site, defects and propose satisfactory repair.

In the absence of any satisfactory response from Beachside, the Applicant proceeded to engage builders to undertake repair work to parts of the roofing.

At around the same time repair work was commencing, the Applicant's broker arranged insurance for the Applicant for both property damage and public liability, including personal injury, obtaining quotes from both Strata Community Insurance (SCI) as underwriting agent for Allianz Australia Insurance Limited (Allianz) and CGU Insurance (via Strata Unit Underwriters).

The Applicant elected to proceed with SCI.  Neither the Applicant, nor its broker, disclosed any information about the defects or repair works being undertaken at the apartment complex.  It was noted by the Court that the quotation slip submitted by the Applicant's broker to SCI did not contain any questions relating to the existence of defects at the apartment complex at policy inception.  Similarly, SCI did not ask any questions of the Applicant on this issue.  The Applicant was made aware of its duty of disclosure in general terms by its broker.

The period of insurance for the Applicant's policy with SCI commenced on 23 March 2017 and on 28 March 2017 Tropical Cyclone Debbie crossed the coast, causing damage to the apartments, including significant damage to the roof with sections of the roof torn off the buildings.

The Applicant made a claim on its policy and during the course of SCI's investigation, the Applicant fully complied and cooperated with SCI, including provision of all prior reports and investigations into the roofing defects.

SCI initially flagged that non-disclosure issues may apply, but on 9 May 2017, SCI issued an email to the Applicant's broker outlining that:

Despite the non-disclosure issue which is present, Strata Community Insurance (SCI) is pleased to confirm that we will honour the claim and provide indemnity to the Body Corporate, in line with all other relevant policy terms, conditions and exclusions.

In its email, SCI further outlined that it intended to rely on policy exclusions to exclude cover for components of loss relating to the rectification of existing defects.

Over the course of a year, numerous engineering and building consultants were engaged by both SCI and the Applicant in order to determine the scope of works required to rectify the damage and delineate what components of the rectification works would be funded by the Applicant and SCI based on what constituted pre-existing defects.

During this process more extensive defects were identified involving the construction of the roof trusses.  The parties disagreed on the scope of works required to rectify the issues with anticipated rectification costs rising into the millions.

As time passed, costs continued to increase and rectification works were further delayed with neither party willing to commence the rectification works until agreement was reached as to the scope of works and who was funding what. Finally, the tense relationship culminated in the Applicant demanding a definitive indemnity position from SCI, setting out exactly what was going to be covered under the policy.  In response, on 28 May 2018, SCI issued a 'take it or leave it' offer of settlement for what it considered to be the cost of rectifying the resultant damage from Tropical Cyclone Debbie, less the cost of rectifying the pre-existing defects.

The offer by SCI was open for 21 days at which point, the offer was said to expire and if not accepted, SCI outlined its intention to reduce its liability for the claim to nil pursuant to s.28(3) of the Insurance Contracts Act 1984 (Cth) (ICA) on the basis of the Applicant's non-disclosure and misrepresentation.

The Applicant did not accept SCI's offer and in response to SCI outlining that it had reduced its liability to nil, the Applicant brought proceedings in the Federal Court of Australia against Allianz seeking orders that it was not entitled to rely on s.28(3) in light of the 9 May 2017 email issued by SCI.

Decision

In his judgment, His Honour Allsop CJ examines a number of insurance issues that often arise in the more complex claims including non-disclosure, misrepresentation, election, waiver, estoppel, the application of s.28(3) of the ICA and the obligation of an insurer to act with utmost good faith towards an insured.

In short, His Honour found in favour of the Applicant, determining that:


  • a reasonable person in the Applicant's position would have known that the defective roof posed a personal injury risk of which SCI would be interested in when considering whether to write the risk;
  • the Applicant, in failing to disclose the defective roofing, had engaged in non-disclosure for the purposes of s.28(3) of the ICA;
  • it was a possibility that SCI would not have written the policy if it had known about the roofing defects;
  • SCI could have relied upon non-disclosure to reduce its liability to nil;
  • as a result of the clearly articulated and expressed email from SCI to the Applicant's broker dated 9 May 2017, SCI had made a choice to waive its ability to rely on a position (that position being reliance on non-disclosure to reduce its liability to nil); and
  • SCI was estopped from resiling from its choice to waive its ability to rely on non-disclosure.

Why this case is important

His Honour's findings are not ground-breaking, however, his judgment provides a detailed recap of a number of important and common insurance issues that arise in complex claims.

Three key takeaways from this case are:

  1. Interestingly, His Honour found that a reasonable person in the Applicant's position was not required to disclose the roofing defects if the policy had been solely for property damage.
    However, as the SCI policy contained a public liability section and a reasonable person in the Applicant's position would have known that falling eaves posed a risk of personal injury that an insurer would be interested in when considering whether to write the risk, these defects ought to have been disclosed by the Applicant prior to policy inception.
    His Honour found that if the undisclosed information with respect to one policy section (i.e. Section A) would have caused the insurer to refuse to write the risk with respect to another section (i.e. Section B), it is open for the insurer to rely on s.28(3) of the ICA to reduce its liability to nil for that other section (Section B) as appropriate.
    Whether this principle is tested with respect to broader policies such as Management Liability Policies will be interesting to see.
  2. Once a position on indemnity, or indemnity issues, has been expressed by an insurer to an insured, even if it is only an interim position, unless there are significant extenuating circumstances it is extremely difficult and unlikely that an insurer will be able to recant its position at a later date.
  3. Allianz was able to successfully establish that it in all likelihood it would not have written the risk if it had been made aware of the roofing defects that were known of prior to policy inception, despite no evidence from the underwriter who wrote the policy.  This judgment provides some guidance on how to get around that obstacle in circumstances where the actual underwriter may no longer be available (or willing) to give evidence of their decision making process.

Contributors

Viv Braithwaite Associate