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Allens Arthur Robinson

Focus: Insurance – March 2001

Waiver, election and affirmation

In brief: We examine common scenarios in insurance claims where the insurer's conduct (as opposed to its express statement) can be deemed to be an affirmation of the contract. 

Introduction

When an Insurer and an Insured enter into an insurance contract, the terms agreed between them are ordinarily evidenced by the policy schedule and wording. As well as a description of the type of cover placed with the Insurer, that policy wording will also provide for the continuing rights and obligations of each of the parties for the life of the policy. Depending upon the policy wording, breach by the Insured of certain obligations usually gives rise to certain remedies for the Insurer. In such circumstances, it is always open to the Insurer to decide to waive that breach. Such a waiver would most commonly be communicated expressly to the Insured. The purpose of this paper is examine common scenarios in insurance claims where the Insurer's conduct (as opposed to its express statement) can be deemed to be an affirmation of the contract.

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The basic principle

Principles of election and affirmation are not peculiar to the insurance field. The classic example is demonstrated in the case of Hughes v Metropolitan Railway. The facts of this case involved the contract for the lease of property. In accordance with the terms of the lease, the landlord gave his tenant notice requiring him to repair certain parts of property within a period of six months. However, during that period the tenant began to negotiate with the landlord for the purchase of the lease. The landlord openly took part in those negotiations. When discussions between the two broke down, the landlord sought immediately to forfeit the lease on the grounds the tenant had not done the repairs required in the notice. It was held that the landlord was unable to forfeit the lease since he had, by his conduct during the negotiations, led the tenant to suppose that he would not enforce his rights to forfeit. Lord Cairns stated that if one party leads the other:

'to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.'

Perhaps the most succinct definition of waiver by conduct was put forward by Latham CJ in Grundt v Great Boulder Pty Goldmines Limited in which he stated that waiver:

'involves an abandonment of a right by acting in a manner inconsistent with the continued existence of the right...'

There is a distinction to be drawn between waiver and election. It is said that for there to be an election there must be a choice between two alternative but inconsistent courses of action about which a person must be aware. Waiver, on the other hand, is merely the giving up of a right by a person with full knowledge of that right. In the insurance arena, as the cases will demonstrate, there has been no real importance placed on this distinction and the two words, together with the resulting 'affirmation' of the contract, have seldom been distinguished.

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The existence of a right

Before an Insurer can be deemed to have waived a right, he must be aware of the existence of facts giving rise to that right. In the insurance field, the cases frequently highlight Insurers' rights in two particular contexts:

  1. When presenting a claim, the Insured will seek to provide the Insurer with as much detail about the claim as is possible. The Insurer will assess the claim based on that information and determine whether or not it falls within the scope of the policy of insurance. In circumstances where the Insurer comes to the view that the claim is not properly covered by the insurance, the Insurer can be said to have a right to decline cover.
  2. One of the principal obligations upon an Insured prior to the contract of insurance being entered into is to give a fair presentation of the risk to the Insurer. This is by operation of the common law duty of utmost good faith in contracts uberrime fidei and under provisions of section 21 of the Insurance Contracts Act 1984. The scope of the Insured's duty at placement and the appropriate remedies available to the Insurer are the subject of other seminars. However, it is important to recognise for the purposes of this paper that in certain circumstances, failure by the Insured (or, more commonly, the reinsured) to give a proper representation of the risk at placement may give rise to a right for the Insurer or Reinsurer to avoid the contract of insurance or reinsurance.

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What the Insured needs to establish

In order to establish an argument for affirmation, the Insured will need to show the following:

  1. that at the relevant time the Insurer had full knowledge of its rights (for example, the right to avoid); and
  2. that with such knowledge the Insurer did some unequivocal and distinct act which constituted a waiver of that right; and
  3. that such an act indicated an intention to treat the matter as if a decision had been made not to exercise that right .

The case of ACN 007 838 584 Pty Limited v Zurich Australian Insurance Limited (the 'Water Tank Case' ) demonstrates the operation of these principles.

In that case, the Plaintiff company ('Retallick') manufactured and supplied several fibreglass water tanks to Kabani Pty Ltd ('Kabani') for installation in an office block in Adelaide. Approximately three years later, in October 1990, one of the tanks ruptured, as a result of corroded reinforcement fittings, and flooded lower sections of the building. Retallick was sued by Kabani for more than $500,000. Retallick had in place a commercial general liability policy with the defendant, Zurich. From an early point, Zurich's legal advisers were of the view that the claim was not properly payable under the insurance policy because it was a claim in contract and not in tort. In their view, it clearly fell outside the scope of cover. Notwithstanding this view, Zurich's lawyers accepted service of the summons in the Kabani action and entered an appearance. Furthermore, Zurich's legal representatives, appreciating that Zurich would not be indemnifying the Plaintiff, continued the conduct of the defence of the proceedings raising a series of positive issues in those defences, all of which failed. Kabani succeeded in obtaining summary judgment against Retallick at which point Zurich, through its legal advisers, denied indemnity to Retallick.

In its separate action against Zurich, Retallick raised the issue of election. Olsson J referred to the case of Sargent v ASL Developments Limited and summarised the concepts from that case as follows:

  1. words or conduct ordinarily required to constitute an election must be unequivocal, in the sense that it is consistent only with the exercise of one of two available sets of rights and inconsistent with the exercise of the other;
  2. there need be no expressed or actual subjective intention to elect. An election is the effect that the law attributes to conduct which, objectively, is justifiable only on the basis that such an election has in fact been made;
  3. a proof of detriment is not a necessary ingredient in election, nor is there any need for proof of communication of the election to the other party involved; and
  4. for the doctrine to operate there must be both an element of knowledge on the part of the elector (the Insurer) and words or conduct sufficient to the amount to the making of an election as between the relevant inconsistent rights.

The judge found that there had been an election on the part of the Insurers. He held this for the following reasons:

  1. since the service of the claim by Kabani, Zurich had failed either to confirm indemnity under the policy or to decline indemnity and leave it to Retallick to defend the claim.
  2. Zurich's solicitors chose to keep Retallick in total ignorance of the proceedings.
  3. Zurich's legal representatives attended the summary judgment application which was ultimately lost.

In Olsson J's view:

'the conduct of the Defendant was objectively justifiable only on the assumption that it had elected to continue the defence of the Kabani claim itself. This it could not do, in the circumstances, without accepting liability to indemnify, for unless it did so accept, it was obliged in fairness to allow the present Plaintiff to conduct the defence. It effectively prohibited the Plaintiff from so doing'.

In that matter, it was recognised by the judge that the result was harsh on Zurich. They had entrusted the matter to their legal advisers who had at all times chosen to keep the Insured ignorant of how the defence of the matter was progressing and never explained to the Insurer the risks involved in not declining indemnity. However, the judge was also of the view that Retallick should certainly not have been prejudiced by shoddy behaviour on the part of Zurich's legal advisers.

It is clear, that an Insurer armed with information which will enable it to decline indemnity must make a decision one way or the other and confirm this to the Insured. That does not mean to say that an Insurer should be rushed into making a decision.

This case also demonstrates the fact that the knowledge and actions of an Insurer's agent can be imputed to the insurer. This would particularly be the case where the Insurer is represented by a firm of solicitors. The same could occur where the Insurer's interests are being represented by another agent such as a loss adjuster or a broker under a binder.

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Making an assessment

As a general statement of the law, Foster J held in Athlone Pty Limited v General Accident Fire & Life Assurance Corporation & Ors that:

'it is clear that a contracting party, when confronted with a situation where he has inconsistent rights arising from the contract exercisable against the other party, has, by law, a reasonable period of time in which to assess his position and make a decision as to which right he will pursue. Further, he may attend to some requirement under the contract during this period of assessment without thereby being held to have elected to affirm.'

The facts of this case were as follows: In responding to a claim, the Insurer, General Accident, argued that the claim fell outside the terms of cover. Furthermore, the Insurer stated that if that argument failed, it would rely on an alleged non-disclosure by the Insured. However, the Insurer did not take any steps to avoid the contract. In particular, the Insurer did not choose to return the premium (a usual procedure when alleging avoidance). Indeed at some stage later in the policy period, the terms of the policy were amended by endorsement. As the claim progressed, the Insurer eventually relied upon the alleged non-disclosure by the Insured as a defence to the claim. The Insurer had initially merely indicated that it might rely on the Insured's alleged non-disclosure. The Insurer, not being privy to any further information since giving that indication, had issued the endorsement in the interim. That was an action consistent with the continuing terms of the policy. Foster J went onto comment that, notwithstanding the general statement of law set out above:

'it is, however, ...abundantly clear in the present case that the lengthy period...after the right to avoid arose and the numerous acts of the Insurer consistent only with acceptance of the policy's remaining on foot, took the case well outside the operation of these principles.'

While the Insurer does have a reasonable time in which to assess its position, it will almost certainly be said to have affirmed the contract in a situation where:

  1. no further information had come to light since developing its original view that it had a right to avoid;
  2. a reasonable period of time had elapsed since that indication was given; and
  3. the Insurer had acted unequivocally in accordance with the terms of the policy by issuing an endorsement.

It is also important to note that the court considered the period in question, between 14 July and 2 September as being more than adequate in which to make an assessment.

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Acting in accordance with the policy

As has been demonstrated, an important element of affirmation/election is that the Insurer is deemed to have elected or affirmed the contract when it is seen to act in accordance with the policy. Where the arrangement between the Insured and the Insurer for the Insurer to conduct the defence arises outside of the strict contractual connection between the parties, the Insurer cannot be said to be acting consistently with the terms of the contract. The case of CE Heath Underwriting & Insurance (Australia) Pty Limited & Ors v Campbell Wallis Moule & Co Pty Limited & Ors is a demonstration of this.

The plaintiffs, Campbell, were a firm of accountants who had a professional indemnity insurance policy with the defendants, Heaths. The policy excluded indemnity in respect of claims by any person advised by Campbell to invest in or lend money to any person named as an Insured under the policy. Campbell advised a client to invest in a business which was controlled by members of the firm. Shortly after that the business failed.

On 23 September 1988 the client sued Campbell for negligent advice. Campbell sought indemnity under the policy. On 27 September 1988 the Heaths' solicitors wrote to Campbell stating that the firm would arrange for an appearance entered and for an attendance on the return of the summons for directions on the strict understanding that by doing so they had not waived the underwriters reservation of rights and added that they would continue to act for Campbell without prejudice to Heaths' rights at that stage.

Campbell confirmed those terms and Heaths' solicitors continued to act for Campbell until 21 February 1989. In the interim, on a number of occasions Heaths' solicitors wrote to Campbell restating that underwriters had not determined to admit liability on the policy and that their rights to deny liability remain preserved.

On 21 February 1989, Heaths' solicitors wrote to the Insured declining liability. In the event, the claim by the client was settled and Campbell sought to recover from Heaths indemnity for that settlement sum under the policy. Campbell claimed that the exclusion clause did not apply and even if it did Heaths could not rely on it because their conduct was such as to amount to an election not to rely on it so that their right to do so was forever gone. Campbell's argument was based predominantly on the clause in the contract to provide as follows:

'underwriters, if they so desire, shall be entitled at their own expense, to take over and conduct in the name of the assured firm the defence or settlement of any claim'

Brooking J held that Heaths could not be said to have elected to accept liability under the policy and were not thereby prevented from relying on the exclusion. In the judges' view, Heaths was acting on the basis of a specific agreement between itself and Campbell rather than on any right under the policy to take control of the proceedings.

From an Insured's perspective, one of the alarming issues in this decision is that the defendants did not ultimately decline the liability until three weeks before trial. However, the court was satisfied that the actions taken by the Insurer's lawyers were consistent with the original reservation of rights. This highlights the importance for Insurers, when reserving their rights to make certain that they do so in a clear and unambiguous way which is accepted by the Insured.

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Spotlight on Insurer's 'intention'

One of the important criteria referred to above in assessing whether a contract of insurance has been affirmed is whether the Insurer indicated an intention not to exercise a particular right. The test for such an intention is an objective one and the court will look at the substance of the Insurer's conduct no matter how many caveats or reservations of rights the Insurer protests.

A good example of this can be seen in Craine v The Colonial Mutual Fire Insurance Co Ltd. In that case, the Insured obtained a fire policy with the defendant Insurer. One of the conditions precedent to liability under that policy was that the Insured should make a claim under the policy within a certain period after sustaining a loss. The Insured failed to do this. In correspondence with the Insured, the Insurer continue to reserve its rights and expressly state that all dealings with the Insured were 'without prejudice' or 'without waiver'. However, the reality of the situation was that the Insurer acted in accordance with a number of their rights under the contract, including taking over recoveries through salvage.

The Supreme Court of Victoria held that since communications had been made expressly 'without prejudice', the Insurer's clear intention was not to waive any rights it might have in relation to the alleged breach of condition by the Insured. This was overruled in the High Court where Isaacs J relied on a previous judgment, again in the context of a lease, given by Parker J in Matthews v Smallwood:

'it is not open to a lessor who has knowledge of a breach to say, 'I will treat the tenancy as existing, and I will the receive rent, or I will take advantage of my power as landlord to distrain; but I tell you that all I shall do will be without prejudice to my right to re-enter, which I intend to reserve.' That is a position which he is not entitled to take up. If, knowing of the breach, he does not distrain or does receive the rent, then by law he waives the breach, and nothing which he can say by way of protest against the law will avail him of anything.'

As Isaacs J commented:

'Insurers are not at liberty to mislead.....They are not at liberty to deny to the insured rights given to him under the contract and at the same time insist on and exercise as against him.... correlative rights given to them by the contract , as a qualification or a safeguard, on the basis that the rights of the insured are in full operation.'

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Key points to note

Claims managers should regularly monitor their claims, including those not being actively pursued by the Insured.

Where investigations are ongoing, Insurers should keep track of the state of knowledge and consider:

  1. What further information has been requested; and
  2. Why that information has been requested.

Insurers would be ill-advised to sit on claims. While mere effluxion of time has not been held to be an affirming action, a delay coupled with any conduct in accordance with the contract could constitute an affirmation.

Insurers should regularly monitor the scope of authority, agreed reporting obligations and independent actions of their agents, such as loss adjusters or brokers under a binder. Their actions could be construed as the Insurers' actions.

Claims managers should be aware of the matters being dealt with by different claims handlers. Remember: waiver, election or affirmation is in relation to the contract and not merely a specific claim. A claims handler with knowledge of certain information in the context of one claim could affirm a contract which is the applicable contract to a different claim being assessed by another claims handler.

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