A HISTORY OF THE DUTY OF UTMOST GOOD FAITH
“The precise definition of the term [utmost] ‘good faith’ depends on the legal context in which it is used.” While this quote does not appear particularly enlightening or conclusive, it is a surprisingly accurate description of the duty. As such, the duty has aptly been described as “a curious animal: arising from an indefinite source, with an undetermined content” of “considerable flexibility and versatility”. Its application is guided by the “legal context in which it is used” and its scope and its operation are still largely unsettled.
At its core, the duty of utmost good faith imposes a standard for both insureds and insurers to uphold in their dealings with each other. It is closely connected to the ideals of “fair dealing, reasonableness and community standards of decency and fair dealing”. However, the exact meaning of the duty is unknown, as it has not been provided an explicit definition in the ICA or in the common law. Its scope is consequently moulded by the precedents set in case law, with each case being determined on a case-by-case basis with regard to what the actions of a “reasonable person in the circumstances” would be. There has been much academic discussion in journals about the duty and its operation, but there is a tendency to “throw up a plethora of terms which can be regarded as synonyms with utmost good faith but which do not really tell us much more about it”.
While the duty of utmost good faith is in force from the pre-contractual to post-contractual interactions between insureds and insurers, the focus of this discussion will be on the post-contractual dealings, which include claims lodgement and administration.
The uncertainty in the area of post-contractual breaches of the duty is in part due to the lack of litigation. This is because prior to the introduction of the ICA, a breach only allowed for avoidance of the contract from inception. This remedy was particularly redundant for the insured, as it would have the practical effect of denying indemnity. As a result, insured parties had no incentive to litigate and thus most litigation was brought forth by insurers for matters of disclosure. Since the introduction of the ICA, the duty has become an implied term in every general insurance contract in Australia. As such, a breach of the duty would allow for the innocent party to sue for damages, avoid the contract or prevent the other party from acting in a certain way.
RECENT REFORMS OF THE ICA
The recent reforms of the ICA do not alter the meaning of the duty of utmost good faith. Rather, the scope of the duty now extends to third-party beneficiaries. In addition, a breach of the duty of utmost good faith is now also a breach of the ICA. Greater powers provided for the Australian Securities and Investments Commission (ASIC) in the reforms means that ASIC can pursue action against an insurer under the Corporations Act for a breach or breaches of the duty of utmost good faith. Under this provision, ASIC has the power to suspend or cancel an insurer’s Australian Financial Services Licence (AFSL). The implication for insurers is that there is uncertainty surrounding ASIC’s discretion as to when they will intervene. This, in combination with the existing lack of clarity about the specifics of the duty, has created a commercial environment devoid of certainty for insurers, in particular. While the purpose of the amendment was to “ensure that the regulatory framework adequately addresses claims handling service”, this has not been without cost. The Treasury has recognised that due to the increased powers of ASIC, there are potential extra litigation costs to both the government and insurers.
Although there are no express provisions guiding ASIC on when to intervene, there is a suggestion that ASIC would only intervene where there has been an “egregious breach” of the duty. It would be difficult to imagine that ASIC would regularly exercise its new power, given the associated costs and its limited resources. Instead, it appears that the added discretion is to arm ASIC in instances where it wants to intervene for the public interest and set a precedent for future interactions between insureds and insurers. In saying this, until there is a set of policies to help direct ASIC, the uncertainty for insurers and insureds alike will remain.
SCOPE OF THE DUTY
While there is a significant portion of the duty that has not yet been explored by the courts, there are certain actions that have been found to be within the scope of the duty of utmost good faith. The duties imposed on the insurer generally relate to issues of either timeliness or transparency in the claims administration process. In relation to timeliness, insurers must act promptly in paying a claim or when deciding whether to accept or deny a claim. Further, insurers must investigate each claim, provide an opportunity for the insured to respond to evidence supporting a refusal of a claim and are precluded from admitting liability for their own benefit.
Moreover, the duty may extend to informing the insured where there is a probability that indemnity will be declined. As a rule of thumb, insurers should “take account of the insured’s interests in exercising its discretionary powers under the policy”.
The obligations placed on the insured party during claims administration are similar to those under pre-contractual disclosure. The insured must disclose all relevant information in the claims process, including information that weakens their position for indemnity.
CGU V AMP
While litigation for the CGU v AMP matter was finalised before the most recent amendments to the ICA, the judgments provide the most recent High Court authority on the duty of utmost good faith.
AMP, an authorised securities dealer, was insured by CGU under a professional indemnity policy. Under the terms of the policy, cover was extended to “claims for civil liability”. Two of AMP’s authorised advisors were involved in a failed investment, which resulted in a complete loss for a number of clients.
ASIC conducted an investigation on the financial advisors in question and deemed the advice and investments were unsuitable. Subsequently, AMP was placed under immense pressure by ASIC to settle the claims in an “efficient, fair and timely manner”.
In response to this pressure, AMP formulated a claims management protocol and proposed it to CGU. While CGU agreed to the protocol in principle, it advised AMP to act as a prudent uninsured and reserved its rights under the policy. Following the settlement and deferred settlement of $3.2 million and $3 million respectively, CGU denied indemnity under the policy.
Following appeals in the Federal Court, the majority High Court of Australia held that the duty “is not to be equated with dishonesty only”. However, there was a split judgment by the judges for other matters of the duty.
In the leading judgment of Gleeson CJ and Crennan J, it was held that utmost good faith may require insurers to act in line with “commercial standards of decency and fairness” with “due regard to the legitimate interests of an insured, as well as to its own interests”. They found that a breach of the duty by the insurer does not allow the court to find the insurer liable to indemnify the insured.
Alternatively, Callinan and Heydon JJ interestingly applied an equitable principle – the doctrine of clean hands, suggesting a requirement that “a plaintiff seeking relief [must] not himself be guilty of tainted relevant conduct”. Here, the justices found that AMP’s conduct was in its own best interest. It wanted to mitigate the negative media coverage and appease ASIC, as it was under pressure to expeditiously settle the claims.
Further, the judges were damning of AMP’s decision not to enact clause 7.8, which would have disallowed CGU from contesting the claim should a senior counsel advise the parties that the claim proceedings should not be contested. As such, they found the conduct of AMP to have “an absence of good faith”.
They further concluded that even if it were found that CGU had breached its duty of utmost good faith, AMP would not have been able to seek relief, as there was “not such a degree of reciprocal good faith”. As such, the justices held that in order for an innocent party to seek relief, two conditions need to be substantiated. Firstly, there must be a breach of the duty by the other party and, secondly, the plaintiff needs to have acted with “reciprocal good faith”.
While the judgments in CGU v AMP are a highly persuasive authority for future cases, the position remains that consequences of a breach of the duty are still to be determined, with the judges of the High Court failing to come to an agreement about the remedies available to the court.
EXAMINING CGU V AMP OF LIGHT OF ICA AMENDMENTS
With regard to the recent amendments to the ICA, it is interesting to examine whether there would be any difference in the handling of the claim by CGU.
It is a contentious issue as to whether the conduct of CGU in the case would fall under the category of an “egregious breach”, but without a set of guidelines by ASIC against which to compare their conduct, there will never be a concrete answer to this question.
It is worth noting that perhaps in the commercial environment after the changes to the ICA, CGU would have conducted itself differently even if ASIC had not intervened. CGU’s delay in making its decision about indemnification may have been different given merely the threat of intervention by ASIC, as the new powers afforded to the regulatory body are so significant.
Perhaps, in future, the possibility of involvement by ASIC may be enough to shape dealings between insurers and insureds.
IMPLICATIONS FOR INSUREDS AND INSURERS
In addition to acting in a timely fashion for claims administration, insurers must be diligent in having “due regard for the interests of the insured”. While there has been criticism of this approach from Justice Chesterman, there may be a practical solution for insurers. The requirement is for the insurer to have “due regard” for the insured’s interests but does not give rise to a fiduciary duty whereby the insured’s interests would usurp their own.
Therefore, when exercising a right, an insurer should consider the impact on the insured. Should the exercise of this right not be reliant on an ambiguous term and thus be in breach s14 of the ICA, the duty should not stop the insurer from exercising their right. However, what may be altered is the method in which the insurer manages claims.
In the example where an insurer is within their rights to refuse a claim, the duty of utmost good faith would not warrant indemnification but may require the insured to administrate the claim quickly and to provide reasons for the claim refusal. The duty’s purpose is not to limit the rights of the insurer, but rather to guide their actions in
exercising those rights.
Further to the established duties of disclosure, the “clean hands” principle introduced by Callinan and Heydon JJ suggests that an insured’s right to relief for a breach of the duty is contingent on their conduct. Previous to this case, there was little authority to suggest that apart from instances of non-disclosure, an insured’s right to damages for a breach by the insurer may be jeopardised should “tainted relevant conduct” be found. Borrowing from equity law, the principle dictates that “he who seeks equity must do equity”.
In the context of claims, this would seem to indicate that an insured cannot claim for a breach if they have not conducted themselves adequately.
However, it is for the courts to decide whether coming with “clean hands” is equivalent to acting in line with the duty of utmost good faith. It would be likely that the courts hold “clean hands” to be identical to the duty because if “clean hands” were held to a higher standard, this would in effect replace the duty for insureds by imposing a higher standard.
Therefore, the practical effect of the introduction of this equitable principle is that in instances where both parties are found to be in breach of the duty, relief is not available to either party.
While the duty of utmost good faith governs the obligations on insureds and insurers, its exact scope of operation and power are still unknown some 30 years after its introduction in the ICA. What is known is that the relationship between insurers and insureds falls somewhere between a standard commercial relationship between supplier and consumer and that of a fiduciary relationship. Therefore, there is no requirement for either party to forego Their own best interests but they must have “due regard” for the other party when asserting their rights.
The biggest uncertainty in the commercial context is ASIC’s greater powers and its discretion in exercising these powers. This is especially of concern to insurers, as there is an exposure to potential intervention from ASIC every time an action regarding a breach of duty of utmost good faith arises. However, the commentary suggesting that intervention would only occur in either important cases or egregious breaches should alleviate some concerns.
There is significant room for development in the law of the duty of utmost good faith, and it will continue to form the foundation on which insurers and insureds interact with each other, including during the handling of claims.
References:1 Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97 at 111; (1996) 9 ANZ Ins Cas 61-317; BC9600516 2 Adams v Confederation Life Insurance Co (1994) 25 CCLI (2d) 180;  6 WWR 662 (Alta QB) at 685,  (Mason J) 3 Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97 at 111; (1996) 9 ANZ Ins Cas 61-317; BC9600516.3 4 Ibid 5 K Godfrey, ‘The duty of utmost good faith – The great unknown of modern insurance law’ (2002) 14 ILJ 3 6 F Hawke, ‘Utmost Good Faith – What does it really mean?’ (1994) 6(2) ILJ 94 7 ‘Focus: The Duty of Utmost Good Faith’, Allens, Newsletter, 2001
8 R Nattrass ‘Extending the unfair contract terms laws to insurance contracts: Is the duty of utmost good faith fair enough?’ (2012) 23 ILJ 299 at 303 9 s13 ICA 1984 10 Ibid 11 G Pynt, ‘Australian Insurance Law: A First Reference’, 2nd ed, Lexusnexis, 2011 12 ss13(1) & (2) Insurance Contracts Act 1984 13 The Insurance Contracts Act – An Overview of Recent Changes and Implications for Insurers, Insureds and Brokers Should this be in single quotation marks?, Holman Webb Lawyers 14 s14A ICA 1984 15 Proposals Paper on Second Stage: Provisions other than Section 54, Consumers’ Federation of Australia, 2004, at <http://icareview.treasury.gov.au/content/_download/submissions_post_proposals/CFA.pdf> (accessed 9 October 2014) 16 Insurance Contract Amendment Bill 2007, Draft Regulation Impact Statement, Commonwealth of Australia Treasury, 2007, at <http://icareview.treasury.gov.au/content/_download/draft_legislation/Draft_RIS.pdf> (accessed 9 October 2014) 17 Consumers’ Federation of Australia, Submission in Response to the ‘Proposals Paper on Second Stage: Provisions Other Than Section 54’, June 2004, p 3 18 Moss and Anor v Sun Alliance Australia  6 ANZIC 60-967 and Johnson v Australian Casualty Co  7 ANZIC 61-109 19 Beverley v Tyndall Life Insurance Company  10 ANZIC 61-453 20 Groom v Crocker  1 KB 194 21 Ensham Resources Pty Ltd v AIOI Insurance Co Ltd (2012) 295 ALR 99 22 Ibid 23 M Ellis, ‘Utmost good faith: The scope and application of s 13 of the Insurance Contracts Act in the wake of CGU v AMP’ (2009) 20 ILJ 92 at 108 24 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 237 ALR 420;  HCA 36; BC200707214 at  per Callinan and Heydon JJ 25 Distillers Co Biochemicals v Ajax Insurance  HCA 3; (1974) 130 CLR 1 26 Case Note: CGU Limited v AMP Financial Planning Pty Ltd, CBP Lawyers, 2007 27 Re Zurich Australian Insurance Ltd  QSC 209 - 28 Godfrey, above n 5, at 3 29 RAF England v Zurich Australia Insurance Ltd (unreported, Adelaide DC, Kitchen J, 30 July 1991) 30 R Keane, ‘Equity and the Laws of Trusts in the Republic of Ireland’, Bloomsbury Professional, 2nd ed, 2011 Bibliography: • Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97 at 111; (1996) 9 ANZ Ins Cas 61-317; BC9600516 • Adams v Confederation Life Insurance Co (1994) 25 CCLI (2d) 180;  6 WWR 662 (Alta QB) at 685,  (Mason J) •
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