In what has proven to be the best and worst of times for insurers, two recent Federal Court of Australia decisions shed further light on when an insurer may be able (or in the case of the second case, unable) to exercise its statutory rights in the event of non-disclosure. In All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited (No 2)  FCA 782, the Federal Court found an insured who had entered into an insurance contract via an agent had failed to comply with its duty of disclosure. In another case, the Full Federal Court affirmed the decision in favour of the insured at first instance in Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788  FCAFC 121.
Case one: Insurance proposal lacks class and unravels insurance claim
All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited (No 2)  FCA 782
The Insured (All Class) was a member of the Steadfast Group (Steadfast), which arranged an annual group policy of insurance for its members with Chubb.
All Class sought indemnity for approximately $2 million of misappropriated funds under an employee theft clause of the group policy. The alleged theft was carried out by its (until All Class’ liquidation) sole director, Mr Bowmaker, between 1 June 2009 and March 2013 and involved the misappropriation of client trust moneys.
Chubb sought to deny liability on three grounds. First, it asserted that All Class had failed to disclose the fraudulent misappropriation in the 2012/2013 policy. Secondly, it denied that Mr Bowmaker was an employee when engaged in the operation of the trust account. Thirdly, Chubb alleged that All Class sustained no direct loss from the theft or fraud and so the insuring clause was not engaged.
An insured’s duty of disclosure
All Class submitted that it was not a party to the Policy but a third party beneficiary under s 48 of the Insurance Contracts Act 1984 (Cth) (IC Act) and therefore did not owe Chubb a duty of disclosure. Chubb argued that the Policy had been arranged on All Class’ behalf by an agent, Steadfast.
Allsop CJ found that All Class was a party to the Policy and did not derive its entitlement to cover from s 48. His Honour made this finding noting the contents of the placing slips, which suggested Steadfast was arranging insurance for the shareholder brokers. It did not matter that Chubb had not issued any certificates of insurance in All Class’ name. Allsop CJ distinguished ABN Amro Bank NV v Bathurst Regional Council  FCAFC 65 and found that Steadfast acted on behalf of its members to obtain insurance rather than obtained insurance in its capacity as a parent.
Eligible contract of insurance?
The court rejected the submission the Policy was an eligible contract of insurance under s 21A of the IC Act which required Chubb to ask All Class specific questions that were relevant to its decision whether to accept the risk. The Policy was not a class of contract declared under the regulations nor was it a contract of new business. Furthermore, the court found that Chubb was only required to give notice in the proper form to Steadfast, which it did.
A lesson in the attribution of knowledge
Section 21 of the IC Act requires disclosure of matters ‘known’ to the insured, which is a standard higher than mere belief or suspicion. Turning to the question of whether the director’s knowledge could be attributed to All Class for the purposes of disclosure, the court followed the principles from Tesco Supermarkets Ltd v Nattrass  AC 153 which requires consideration of the “directing mind and will” of the company.
Allsop CJ found that Mr Bowmaker was the sole director and shareholder of All Class and a significant proportion of the misappropriated funds were paid into All Class’ own accounts to keep All Class afloat. Accordingly, Allsop CJ found that Mr Bowmaker was the directing mind and will of the company. The information provided to the insurer at the placing of the policy did not disclose anything in relation to All Class. On this basis, Allsop CJ found that All Class had engaged in fraudulent non-disclosure.
Was Mr Bowmaker acting as an employee?
Although not central to the case given Allsop CJ found the policy could be avoided, Allsop CJ made some comments as to whether Mr Bowmaker was acting as an employee. He found that Mr Bowmaker could be considered an employee when conducting or undertaking acts within the usual scope of his duties when dealing with the relevant accounts. This was because such activities would be within the usual scope of administrative duties of an employee.
What are some takeaways?
The case of All Class provides useful guidance on when a person may owe a duty of disclosure under a group insurance arrangement. Following ABN Amro, a person who is an ‘insured’ may not be a party to a contract if its entitlements arise under s 48 and therefore may not owe a duty of disclosure. Accordingly, it is critical that a policy is clear whether the right to indemnity arises as a contracting insured or under s 48, especially in group policy arrangements.
Furthermore, although obiter, the case suggests that directors can also be considered employees under employee coverage sections of policies. It depends on the nature of the tasks carried out by that person and the definition set out in the policy.
Case two: Court waives goodbye to insurer’s appeal
Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788  FCAFC 121
The decision (McKerracher and Colvin JJ in the majority, Derrington J dissenting) largely reaffirmed the decision of the primary judge in Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd (No 2)  FCA 588, dismissing the insurer’s appeal.
The case involved cyclone damage to an apartment complex (Delor Vue) in Yeppoon, Queensland. Allianz confirmed cover notwithstanding non-disclosure issues and agreed to pay the claim subject to the terms of the policy. A year later, Allianz wrote to Delor Vue with a take it or leave it offer, and indicated it intended to reduce its liability to nil on non-disclosure and misrepresentation grounds if the offer was not accepted. At first instance, Allsop CJ found Allianz was estopped from changing its mind and reducing its liability to nil. In the alternative, Allianz had waived its entitlement to do so. Allianz appealed.
You can read our summary of the decision at first instance here.
The issues on appeal
The appeal judgment provides guidance as to when the doctrine of election applies. It confirmed that the common law doctrine of election is concerned with circumstances where a party is required to make a binding choice. In an insurance contract, the law requires an insurer to elect between disclaiming liability and seeking to rely upon the rights conferred by the policy. Having said this, there is no obligation to elect unless and until the relevant party is aware of the relevant facts. But in this case, the insurer did have the relevant facts.
The majority also looked at the insurer’s rights under s 28(3) of the IC Act, which entitles an insurer to reduce its liability to nil. That entitlement is directly inconsistent with the position to enforce rights under the policy, to enter the property and adjust the loss for which it had accepted liability. The insurer had exercised those rights for a year and so it could not now resile from that choice.
In dissent, Derrington J was of the view no election could arise in the circumstances because Allianz did not have to choose between terminating the contract or allowing it to continue on foot. The ‘right’ under s 28(3) was not contractual. Justice Derrington was of the view that all that had happened was that the insurer had agreed to pay more in relation to the claim than it was obliged to do so.
On appeal, the insurer sought to argue the estoppel case should not be upheld because Delor Vue had failed to prove a counterfactual. However, the majority held there does not always need to be evidence of a counterfactual.
The majority found the conduct by Allianz meant that it had the carriage of repairs for the whole of that time and that Delor Vue, by reason of representation from the May 2017 email, had no reason to pursue Allianz. Consequently, Delor Vue could not be restored to a position where its dealing with Allianz occurred because of the representation.
In dissent, Derrington J was of the view that the estoppel case could not be made out because Delor Vue had not established the detriment it would face if Allianz resiled from its promise.
The majority found that Allianz had waived its entitlement to relying on s 28(3) of the ICA. Drawing similarities to Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305, the majority concluded that Allianz had full knowledge of the circumstances and had made a deliberate act to confirm cover and treat the relationship as if there was no non-disclosure.
Again, in dissent, Derrington J was doubtful ‘waiver’ occurs simply because a party adopts inconsistent positions with respect to them in circumstances which do not amount to an election. Justice Derrington questioned whether there is indeed a separate principle of ‘waiver’ other than in the nature of forbearance, abandonment or renunciation. Justice Derrington also noted that Delor Vue had avoided any precision as to what was allegedly waived.
Duty of utmost good faith
The insurer argued it could not have breached its duty of utmost good faith given it was permitted by law to rely on s 28(3) of the IC Act. However, the majority affirmed the decision of the primary judge because the breach had to be assessed at the time it occurred, not with the benefit of hindsight. The majority was critical of Allianz’s conduct whereby it relied on the May 2017 email, which accepted indemnity, for more than 12 months. They reiterated that the duty ‘encompasses notions of fairness, reasonableness and community standards of decency and fair dealing’.
Justice Derrington also dissented on this ground in finding that Allianz did not breach its duty of utmost good faith. Allianz had partially honoured the claim in good business sense and at the time, was unaware of the magnitude of the remediation work which would actually be required.
Some concluding thoughts
As we wrote in our summary of the primary judgment, insurers should take note of the importance of clear communication, especially if there is the possibility of raising non-disclosure or exercising other rights under the policy. The dissenting comments of Derrington J also provide some interesting views on how these grounds could potentially play out in the future, especially if the court is offered such an opportunity in a different factual matrix.