In life, they say that honesty is the best policy. But did you know that it is actually also one of the most important provisions in an insurance contract?
Section 13 of the Insurance Contracts Act 1984 deals with the duty of utmost good faith between insurers and insureds. In simpler terms, it means both parties must be honest and transparent in their dealings. It is an implied term of each and every insurance contract formed within Australia, and applies during the inception and renewal of an insurance contract, as well as well as during the claims process.
The insurer’s duty
Examples of the duty of an insurer to act with the utmost good faith includes prompt claims handling; ensuring all proper investigations are carried out before denying a claim; clear and transparent communication; offering fair, timely and reasonable settlements; acting in the insured’s best interests; and complying with relevant laws (such as the Insurance Contracts Act).
In Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701 the insurer was found to have breached its duty of utmost good faith. In this case an insured held a home building and contents insurance policy with the insurer, and made a claim following a hailstorm. The insurer accepted the claim and appointed a builder to complete the repairs; however, it took more than 2 years for the repairs to be completed. The insured raised a number of complaints with the insurer, but did not receive a positive response.
The Federal Court of Australia found that the insurer had breached its duty of utmost good faith as it did not engage in clear and transparent communication with the insured as the insurer did not inform the insured of the repairer being disreputable or ensure the prompt handling of the claim.
At the time of this judgment, insurers were not at risk of a civil penalty for a breach of the duty of utmost good faith, meaning that even if it was determined that the duty had been breached, the insurer was not liable to pay any penalty. Since then, section 13(2A) of the Insurance Contracts Act has been introduced exposing insurers to the risk of a civil penalty in the event an insurer breaches the duty.
The insured’s duty
Examples of the duty of an insured to act with the utmost good faith includes prompt notification of a claim; providing cooperation throughout the claims process; paying a premium on time; and to be honest and provide full disclosure. Insureds must, at all times, provide their insurer with accurate and complete information when applying for insurance coverage or lodging a claim.
The Victorian Court of Appeal in To v Australia Associated Motor Insurers Ltd [2001] VSCA48 provides some insight into an insured’s breach of the duty. In this case, To’s unlicensed 15 year old son took her vehicle for a joyride (without her consent) and had an accident, damaging the vehicle. Unbeknownst to To, her insurance policy actually covered her for the damage to the vehicle when being driven by an unlicensed person without her consent; however, fearful of having her claim denied, To lodged a claim with her insurer falsely claiming that someone had stolen and damaged her vehicle. The insurer subsequently denied the claim when it was discovered To had failed to provide full disclosure of the circumstances.
To argued that since her policy would have covered her regardless, her lies were of no consequence. The Victorian Court of Appeal rejected this argument. The Court confirmed that To’s insurance claim would have been valid if she had not lied, however, found that because she lied and failed to act in accordance with her obligation of utmost good faith, that To was in breach of her policy, and her claim was rightfully denied by her insurer.
About me (Ashley Chidiac) – I am a lawyer within the Sydney Insurance team. When I am not busy at work, I love to spend time with my family, try new restaurants, or watch my favourite crime/detective TV show (currently rewatching NCIS, the best!).
