FCA declares insurer in breach of duty of utmost good faith

In brief 4 min read

The Federal Court has declared that Youi Pty Ltd (Youi) breached its duty of utmost good faith under section 13 of the Insurance Contracts Act 1984 (Cth) (ICA) in relation to its handling of an insurance claim for damage to an insured's home.¹

The decision is an important reminder of the broad scope and potential reach of the duty.

Key takeaways

• The duty of utmost good faith implied into insurance contracts requires the insurer to act consistently with commercial standards of decency and fairness.
• A failure by an insurer to handle claims with full and frank disclosure, clarity, candour and timeliness, or to appropriately respond to an insured's complaints, may result in a breach of the duty.
• With the introduction of subsection 13(2A) of the ICA in March 2019, a failure by an Insurer to comply with the duty exposes it to the risk of a civil penalty. 
• Insurers should act with due regard to the legitimate interests of an insured.

Section 13 of the ICA

Section 13 of the ICA implies into every contract of insurance a provision requiring each party to act towards the other with the utmost good faith. The duty applies in respect of any matter arising under, or in relation to, the contract.

Since the introduction of subsection 13(2A) of the ICA in March 2019, a failure by an insurer to comply with the duty exposes it to the risk of a civil penalty, an amendment which Chief Justice Allsop has described extrajudicially as creating 'very real financial consequences for conduct which, when judged against societal standards of decency and fairness, falls short.'² 

The facts

An insured held a home building and contents insurance policy with Youi. Following a severe hail storm in November 2016, the insured made a claim which was accepted by Youi, who engaged a builder to undertake repairs. However, it was not until November 2018 that the repair works were completed. In addition, a number of complaints from the insured during this time were not dealt with satisfactorily by Youi.

Youi's conduct was brought to the attention of the Financial Services Royal Commission as a case study.³ The Commission found that 'Youi may have breached its duty of utmost good faith' and referred Youi's conduct to ASIC 'to consider what action it could and should take.'⁴

ASIC commenced proceedings in April 2020 seeking declaratory relief in relation to alleged breaches of s13. Youi admitted it had breached the section and so the scope of the dispute was narrow, relating only to the terms of the declarations to be made.

Declarations

In his judgment of 26 November 2020, Chief Justice Allsop declared that Youi breached its duty of utmost good faith by failing to take reasonable steps to:

• inform the insured that the contractor retained to perform the repairs was the subject of numerous complaints and no longer a recommended repairer, to afford the insured the opportunity to request an alternate contractor and to terminate the contractor's engagement;
• over a period of four months, ensure that the contractor commenced the repairs;
• over a period of two months, effect make-safe works to the property;
• respond to a formal complaint made by the insured for over six months; and
• respond to an email following up on the complaint.

Duty of utmost good faith

The Chief Justice referred extensively to an earlier decision this year in which he which outlined the 'various expressions of the content of the obligation to act with utmost good faith'.⁵ Some of the key points were that:

• the duty may require an insurer to act consistently with 'commercial standards of decency and fairness', with due regard to the interests of the insured;
• lack of honesty is not a prerequisite to breaching the duty; capricious or unreasonable conduct will also constitute a breach; and
• the duty is of utmost good faith, which requires more than mere good faith and will usually require affirmative or positive action.

Some of the examples of breaches in the authorities relating to prompt decision-making and communication with the insured reflect the breadth of the duty and the range of contexts in which the duty may operate throughout the life of an insurance contract.

Implications

While Youi's conduct took place before the introduction of s13(2A) of the ICA and was therefore not subject to a civil penalty, this case is a reminder of the types of breaches that can now result in pecuniary penalties for insurers.

A media release from ASIC noted that the case 'has important warnings for insurers about conduct that breaches the key duty of good faith, and about the rights of insureds in relation to how their insurance claims are handled.'⁶

It is also important to bear in mind that the duty of utmost good faith implied by s13 does not apply only to contracts of insurance involving retail customers (such as home and contents insurance). It applies to all contracts of insurance governed by the Act. This includes commercial classes of insurance such as professional indemnity, directors and officers liability and a wide range of other general insurance products.