The duty of utmost good faith 'given teeth'
The statutory duty of utmost good faith, found in s13 of the Insurance Contracts Act, is implied into every insurance policy to which the Act applies (which, in practice, is most types of insurance contracts issued in Australia, other than reinsurance, private health insurance and certain other categories). Further, it is wide in scope, applying to both the insurer and insured, and arising from the time of pre-contractual negotiations through to the conclusion of any claim.
While there is no precise definition of the duty, the High Court has held that it requires an insurer to act 'consistently with commercial standards of decency and fairness' and 'with due regard to the interests of the insured'. Further, in CGU Insurance v AMP Financial Planning (2007) 235 CLR 1, the High Court made clear that the duty requires more than honesty alone; it is also concerned with the substantive conduct of an insurer, regardless of how fair or reasonable it thought it was behaving in the circumstances.
Until recently, the duty of utmost good faith has been infrequently cited before the courts. While it has long been available as a remedy to policyholders, the duty was often seen as too vague and amorphous to be of much assistance; and from the standpoint of ASIC, the duty was only enforceable through licensing action (such as a variation or suspension of an insurer's AFSL), a remedy which Commissioner Hayne described as a 'very blunt instrument of enforcement'.
Since then, however, following a recommendation by the ASIC Enforcement Review Taskforce, the duty has been 'given teeth' as a civil penalty provision, subject to significant penalties for corporate entities of up to $11.1 million per contravention, three times the benefit derived or 10% of turnover (up to a maximum of $555 million). This change applies to all conduct from 30 March 2019.
Further, since the Financial Services Royal Commission, a number of proceedings have been commenced by ASIC alleging contraventions of the duty — including ASIC v Youi and ASIC v TAL — which have yielded positive results for the regulator. Both cases involved conduct occurring before 30 March 2019, and so did not result in any financial penalties. However, the court's reasons for judgment provide a helpful insight into the scope and content of the duty (which we go on to explore below).
As further cases are litigated before the courts, and greater definition is given to the duty of utmost good faith, we expect it will also become a far more appealing prospect for policyholders. Insurers should expect to see growing utilisation of this duty, both in individual policy claims and the regulatory enforcement space into the future.
As the duty of good faith is a normative one, it is hard to lay down absolute rules for when a contravention may arise. Chief Justice Allsop has recently observed that '[i]t is impossible to be prescriptive in advance as to how decent and fair conduct by an insurer should be judged in all cases'. Notwithstanding this, the case law does provide some useful guidance to insurers, and the Federal Court's recent judgments in ASIC v Youi and ASIC v TAL provide a helpful illustration of how insurers can fall foul of the law.
The cases can be distilled into the following key principles:
Honesty: while dishonesty is not a necessary element of a contravention, it is one of the clearest ways one can arise. A lack of honesty will be found in deceptive remarks during policy placement or claims handling and can also manifest in other ways, such as a failure to be candid with a policyholder about limitations in the coverage they have requested or the denial of a claim without having properly investigated the facts.
Fairness: the duty of utmost good faith requires an insurer to act decently and with regard to the interests of the insured. This will not be satisfied where an insurer: (i) makes unreasonable or unnecessary demands, such as onerous information requests to adjust a claim; or (ii) acts in a sharp or self-interested manner, such as 'hard ball' settlement tactics or making 'groundless and hurtful statements'. In general, it is important that insurers have a principled and commercial basis for every step they take.
Timeliness: insurers are expected to resolve claims efficiently, and to decide whether to accept or reject them within a reasonable period of time. As Justice Emmett noted in CGU Insurance, an insurer's failure to do so – and especially a failure to 'make a prompt admission of liability to meet a sound claim for indemnity' – is likely to give rise to a breach of duty. So, too, is a failure to make prompt payment in these circumstances, or to ensure the swift commencement of repairs. The position will be different, of course, where an insurer is entitled to deny indemnity, or is still awaiting key details necessary to determine this question.
Transparency: in handling claims, insurers are also expected to be transparent with policyholders, and to ensure that both the outcome and the process are fair and reasonable. Where insurers hold genuine concerns about exclusions or non-disclosure, these should be squarely put to claimants to give them a proper opportunity to explain their position and provide further relevant materials. Covert investigations, lack of consultation or a denial of procedural fairness may all result in a finding of contravention of s13.
Case Study – ASIC v TAL
Background
The insured applied for an income protection policy with TAL and disclosed her medical history as part of the application process. Her application was accepted in October 2013. In December 2013, the insured was diagnosed with cervical cancer and lodged a claim. This prompted TAL to investigate the insured's medical history and void her policy due to a failure to disclose a period of depression from 2007 to 2009.
In voiding her policy, TAL told the claimant in writing and over the phone that she was in breach of her duties of utmost good faith and disclosure and could be liable to repay $24,000 in benefit payments.
The insured took the matter to the Financial Ombudsman, and it was settled by a payment from TAL of $25,000. Later, this matter was highlighted by the Financial Services Royal Commission and ASIC brought proceedings against TAL in the Federal Court for breach of its duty of utmost good faith.
Key findings
The court found that TAL had breached its duty of utmost good faith by:
- failing to provide the insured with a proper opportunity to address the non-disclosure of her prior medical condition, and instead carrying out the investigation in a covert manner;
- accusing the insured of acting in breach of good faith without grounds; and
- threatening to recover benefit payments, where those payments were made after TAL had already commenced an investigation into the validity of the insurance, and where the insured had no opportunity to arrange her affairs to protect herself.
Chief Justice Allsop called this kind of conduct 'arbitrary, capricious and unreasonable'.
Takeaway
The court framed the duty of utmost good faith in the context of 'normative standards judged by reference to community expectations'. This concept of community expectations featured heavily in the Financial Services Royal Commission. It is clear from this case that the duty will not be assessed by a dry application of legal principles — but rather with an appreciation and sensitivity to human factors and the role of insurers in the community.
Last year, Allens reported on the Federal Court's other recent decision in ASIC v Youi, which also resulted in declarations of contravention against the insurer.