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The duty of good faith: The ‘sleeper’ of insurance obligations?

16 June 2006

The duty of good faith is central to both the contract of insurance and the relationship between insurer and insured. This article* briefly examines the law on the duty of good faith in Australia and the United States and concludes that the law in the two countries is broadly similar. From this perspective, it is then instructive to note in how many respects the law on the duty of good faith in Australia is probably not as settled as many tend to assume. As a result, there is much greater scope for insureds to utilise the duty of good faith as a means to secure greater relief for full and fair performance of the contract of insurance, than has occurred to date.    

Contents

Introduction
Background and context
Duty of good faith: the insured's perspective
Conclusion: Good faith — a defensive shield and sword?
Footnotes

Introduction

The duty of utmost good faith which is imposed on a contract of insurance is often said to be analogous to an obligation to act fairly,1 with its statutory genesis under the Insurance Contracts Act 1984 (Cth) (ICA) informed in relevant parts of the legislation by certain moral or ethical content.2

This duty of good faith informs and regulates all aspects of the contract of insurance, from inception through to the terms of the contract, to each party’s responsibilities in the event of a claim under the contract of insurance.3

Given therefore its broad reach to almost all aspects of the insurance relationship and its requirement that the parties to the contract of insurance, effectively, act fairly—the question arises: why has the issue of good faith arisen so comparatively rarely in Australia in the last 20 years, especially when compared to the United States’ experience?

At one extreme, the answer could be that the insurance relationship in Australia between insurer and insured is conducted fairly, hence the apparent paucity of actions involving allegations of bad faith. At the other extreme, it could be that contrary to popular perceptions and commentary, the duty of utmost good faith has not yet come of age in Australia.4 

If the answer to this question lies towards the latter explanation, then the practical ramifications for the insurance industry and relationship are potentially enormous. For it will mean that the current relationship between insurer and insured and the practical conduct of the insurance relationship in this country is yet to be fully informed by the obligations and ramifications entailed in the duty of utmost good faith. In turn, this could presage considerable litigation and possibly, major adjustment to the manner in which the insurance relationship is currently managed between the parties.

Background and context

In order to explore why the issue of good faith seems to have arisen so comparatively rarely in Australia in the last 20 years and what this may teach us about the current state of the duty of good faith and its role within the insurance relationship in this country, it is first necessary to set the context of the duty of good faith in Australia and the United States.

In both countries, Lord Mansfield’s judgment in 1766 in Carter v Boehm (1766) 3 Burr 1905 at 1909–10; 97 ER 1162 at 1164 is still regarded as the seminal judgment on the duty of good faith:

Insurance is a contract upon speculation.
The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation, and proceeds upon the confidence that he does not keep back any circumstance in his knowledge …
The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement.
The policy would equally be void, against the underwriter, if he concealed …
The governing principle is applicable to all contracts and dealings.
Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.

The common law operation of the duty of good faith following this judgment has gone through an interesting history and development in the last 200 plus years in Australia and the United States. However, this common law development became, as a matter of common industry importance, largely irrelevant in Australia, following the enactment of the ICA and in particular, Part II, which both clarified and altered the traditional common law position.5 

One of the aspects of the duty of good faith which remained despite this statutory intervention, was the lack of a widely settled and accepted definition of what constitutes ‘good faith’ under the ICA. The ICA contains no definition of ‘utmost good faith’. The Explanatory Memorandum to the Insurance Contracts Bill 1984 also does not contain any definition or explanation as to the meaning of ‘utmost good faith’. Rather, it is talked about as a well-accepted term, and that it is a ‘paramount duty’.6 Much has been written about the precise scope and meaning of these words7 and how they are not capable of easy definition.8 Yet it seems to be well accepted that its foundation imposes an obligation of fair dealing and ‘in essence, it encompasses notions of fairness, reasonableness and community standards of decency and fair dealing’.

This test, as articulated by Professor Sutton, has been cited with approval by Walsh J in Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Insurance Cases 61-197 at 78,258.10 In the same case on appeal,11 and in Vermeulen v SIMU Mutual Insurance Association (1987) 4 ANZ Insurance Cases 60-812, it was also noted that a core aspect of good faith in the insurance claim was ‘honesty’. In CIC Insurance Ltd v Barwon Region Water Authority (1999) 10 ANZ Insurance Cases 61-425, it was considered that an essential element of the duty was ‘honesty’, which also extended to a requirement to ‘act fairly and reasonably [not] contrary to community standards of decency and fair dealing’ (at 74,774 per Ormiston JA).

The decided cases to date (both under common law and pursuant to the ICA) recognise, as Ambrose J noted in Gutteridge v Commonwealth (unreported, Supreme Court, Qld, Ambrose J, 25 June 1993) page 11: the duty of ‘utmost good faith’ involves more than ‘merely acting honestly’.12 The precise scope of what constitutes the ‘more than merely acting honestly’, as well as fairly, remains uncertain and is explored in more detail below.

Outside of insurance, under the law of contract in Australia, the duty of ‘good faith’ includes three requirements:

  1. acting with due regard to the interests of the other party 
  2. acting reasonably13  
  3. not acting for any improper motive.14  

With regards to the duty of good faith and its impact on the insurance relationship in the United States, the purpose of this article is not to seek to provide such an overview, especially when the writer is so poorly qualified to do so. Rather, with the benefit of a number of excellent papers on this topic15 and discussions with various leading United States lawyers in this sphere,  it is possible to note:

  1. as a matter of general legal obligation, how similar the law of the duty of good faith is between Australia and the United States, and
  2. how differently and much more actively insureds have sought to seek relief for breaches of the duty of good faith from the insurance industry in the United States as opposed to Australia.

What this and the comparative analysis table set out at the conclusion of this article reveals, is that the concept of the duty of utmost good faith and its legal content is fairly similar in the two countries, despite the fact that in Australia the remedy for good faith is now largely governed by statute (ICA) as opposed to common law, as is still the case in the United States.

In terms of the practical obligation of the duty of good faith, the insurance industries in both Australia and the United States have published Industry Codes of Practice. Again, as revealed by the second table at the conclusion of this article, these codes of practice are quite similar in respect of the duty of good faith.17 

The differences of course emerge in a comparison of the manner in which American insureds utilise the duty of good faith and the remedies available for a breach of this obligation. Yet, despite these (and other) differences, the American experience is still instructive.

In the United States the damage awards for medical malpractice or product liability claims regularly produce sensational headlines and are talked about as the country’s largest; yet in actual fact first party insurance bad faith claims produce higher damage awards.18

The scale of bad faith claims against insurers in the United States is illustrated by the fact that specialists in the field say that it is impossible to list the exact number of cases involving bad faith claims, for there are too many.19 Australian cases to date present no such difficulties.20

In Australia, you will be hard pressed to find a decision where damages for a breach of the duty of utmost good faith have been large, or even itemised as damages for breach of the duty of good faith. Whereas in the United States bad faith damage awards exceeding US$100 million are not uncommon.21 The following cases are good examples of this at first instance:

Duty of good faith: the insured’s perspective

What emerges from a comparative analysis of the application of the duty of good faith in the United States and Australia, are two important traits:

Indeed, a critical review of the duty of utmost good faith in Australia from the focal point of an aggrieved insured, reveals much more scope to challenge the insurer, than has probably been realised to date (in both theory and practice). The following analysis and discussion of the scope and extent to which the duty of utmost good faith currently operates in Australia, is therefore undertaken with particular reference to the scope for the current application of the duty of utmost good faith to alter and become more onerous on insurers.

Pre-contractual

Ever since the duty of good faith was articulated in Carter, the tendency has been to consider the obligation of good faith in the context of non-disclosure at the inception of the contract of insurance.22 

As previously noted, this tendency is a mistake, for the duty of the utmost good faith applies to and informs all aspects of the insurance relationship. It is also a mistake, for ironically in light of its historical foundations and the fact that the ICA treats the duty of the utmost good faith as paramount,23 Part II of the ICA does not apply to an insured’s obligations of disclosure.24 The reason for this one carve out of the obligation of the utmost good faith is that section 21 of the ICA sets out the duty of disclosure, and it was considered, did so in a manner ‘as much as the duty of the utmost good faith would require’.25

As a consequence, the duty of the utmost good faith has tended to be ignored in the context of the obligations and remedies concerning disclosure prior to the relevant contract of insurance being entered into. However, this conventional approach only reflects the perspective of one of the parties to the contract of insurance. Namely, the insurer. Section 12 of the ICA is only limited in that it does not impose any additional obligations on ‘an insured’ in relation to disclosure—Part II is not excluded in relation to an insurer’s obligations with respect to disclosure.

It therefore follows that there may be circumstances in which the duty of the utmost good faith imposes higher obligations on an insurer and or preferable remedies for the insured in relation to the insurer’s conduct prior to the inception of the contract of insurance, than those stipulated under Part IV ICA.26 This is especially possible, given that, although in 1982 it was considered that Part IV of the ICA reflected ‘as much as the duty of the utmost good faith would require’,27 the obligations of utmost good faith may well have altered, probably with an increase in the duties owed, over time.

Professor Sutton considered that in essence good faith:

... encompasses notions of fairness, reasonableness and community standards of decency and fair dealing. It imposes a market standard of fairness, that is, what is customary and acceptable conduct in the particular commercial activity concerned … as established by expert evidence.28

This judicially approved analysis29 clearly involves notions of community standards and acceptable conduct, which can and do change over time. Equally, the standard of ‘reasonable’ behaviour in good faith,30 can and will alter over time in accordance with community standards and expectations, as has been well recognised in respect of the ‘reasonable care’ standard for the common law of negligence.31

It is therefore open to an insured in a pre-contractual dispute with an insurer to both seek relief on the basis of a breach of the duty of utmost good faith and in doing so, to argue that the content of this duty is different (if not more onerous) than set out for the duty of disclosure in Part IV of the ICA. This does not seem to be well appreciated by the insurance industry. This duty could be different to (if not more onerous than) the duty of disclosure as set out in Part IV of the ICA, because the duty or obligation of good faith has evolved over time in accordance with community standards and expectations. In other words, community standards as to what was the required level of honesty and openness as contemplated by Lord Mansfield for pre-contractual disclosure and good faith in 1766,32 no doubt had altered by 1983 when the ICA was drafted and has probably changed further, in the 20 plus years since.

Hence the practical issue arises—to what extent (if any) is the duty of good faith as it applies to disclosure now more onerous than set out in Part IV of the ICA? To date, this question does not appear to have been tested in Australia. It seems likely that community standards and expectations have probably become more, rather than less, onerous for insurers in the period since the ICA was drafted. For example:

  1. In this period (1984-2004) community expectations of good corporate behaviour has grown and this has been reflected in the ever increasing number and breadth of statutory and regulatory obligations designed to achieve compliance with such expectations.33 
  2. In relation to the insurance industry, the extent to which statutory obligations imposed by corporations and insurance law alone, has dramatically grown and become more demanding upon insurers between 1984 and 2005. See for example the additional obligations imposed by the Corporate Law Reform Economic Reform Package (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9).34
  3. The raft of recent collapses of insurance companies in Australia (as well as overseas)35 and the community and commercial dislocation which this has caused (graphically exemplified in Australia by the collapse of HIH Insurance Ltd). Coupled and subsequent to this has been the spate of regulatory scrutiny and actions to which the insurance industry has been subjected, with many of these actions having been successful and widely publicised. These events and the impressions (if not suspicion) it creates about the practices of the insurance industry and its compliance with customary and acceptable conduct, is likely to inform and influence the content of the duty of utmost good faith.

Given the prospect of insureds pursuing relief for pre-contractual breaches of the duty of good faith outside of the ICA, the experience in the United States which has no ICA and statutory carve out for the duty of disclosure, is therefore especially instructive. This experience is that the insurer’s obligations of good faith prior to the inception of the contract of insurance continues to be a fertile field of complaint, litigation and damage awards in the United States.36

Investigation of claim

In the investigation of a notified circumstance or claim under the insurance, the parties must act with fairness and honesty.37 This obligation though extends beyond just honesty, for the duty of utmost good faith is a higher standard than that of good faith and therefore contains other elements than honesty.38 

Among those other elements is the fact that the insurers’ obligation, as part of their obligation of good faith, is to investigate the claim promptly.

As Professor Sutton correctly observed,40 if an insurer:

the insurer may be in breach of the duty of the utmost good faith depending on the circumstances of the case, and consequently be liable to pay damages to the assured for any loss suffered. It must be remembered however, that courts are not quick to find a party in breach of the duty of utmost good faith. Insureds and insurers are entitled to be wrong in good faith.45 Equally, a breach of a term of an insurance contract does not automatically connote lack of good faith.46

Similarly, it is well accepted that the usual conditions in contracts of insurance about the investigation of a claim enable the insurer to ascertain the character and amount of the loss, to test the correctness or genuineness of the claim, as well as to detect possible exaggeration or deliberate falsity,47 before being required to make a decision on the submitted insurance claim.

The position is much the same in the United States. Unreasonable behaviour on the balance of probabilities can give rise to bad faith and such unreasonable behaviour carried out with malice or intent, established with clear and convincing evidence, can give rise to punitive damages. However, if the breach of the term of the contract of insurance is not unreasonable or to put it another way, reasonable minds could differ, then usually this will not give rise to a valid bad faith claim.48

The principles are relatively clear. What is not, is:

How long can an insurer reasonably investigate a claim?

At present in Australia, there does not appear to be a bright line answer to precisely how long an insurer has to investigate a notified circumstance or claim under the policy of insurance. It all depends on the circumstances. Nor has such a precise reasonable period been established in the United States.

In Australia, considerations at common law or under the ICA have concluded that a reasonable period of time has ranged between 90 days to examine a claim concerning a stolen vehicle and its value,49 up to four months to determine policy indemnity for fire damage to a general store.50 In between, it has been held that seven weeks was a reasonable period to determine indemnity,51 while in New Zealand, five and a half months was considered to be an unreasonable period of time to determine indemnity for a house damaged by fire.52

The decisions in the United States are, if anything, even more varied: two months to investigate a claim before a decision was made on indemnity has been held to be unreasonable; four months was not unreasonable; and whether a delay of two and a half years was unreasonable and a breach of the duty of good faith, was not sufficiently clear to be resolved on summary application.53

It could also be that, past guidelines and decisions as to what constitutes a reasonable time are of limited relevance, given that the duty of utmost good faith ‘encompasses notions of fairness, reasonableness and community standards of decency and fair dealing’.54 Hence, acceptable past practices are open to change.

Although a precise range of reasonable time has not been definitively set, the principles of what conduct will or won’t constitute a breach are more clear. Where insurers deliberately string out the investigation, for example, by conducting investigations that are not part of a bona fide attempt to determine whether the contract of insurance responds or having reasonably concluded that the contract of insurance responds, but continuing the investigation in the hope of finding evidence to establish otherwise; seems likely to lead to a finding that the insurer breached its duty of utmost good faith.55

What information can the insurer reasonably require from an insured?

In Carter,56 Lord Mansfield noted, albeit in relation to an insured’s disclosure obligations to an insurer, that ‘the underwriter trusts to his representation, and proceeds upon the confidence that he does not keep back any circumstance in his knowledge’. In terms of providing information on the making of a claim under the insurance policy, what are the precise obligations of an insured under the duty of good faith to provide information which may enable the insurer to deny cover?

As a matter of principle, it would seem to be as stated by Lord Mansfield and therefore extends to an obligation to volunteer all relevant information, so that the insurer can investigate the claim fully informed. The relevant authorities are to much the same effect, namely that:

This is all tolerably clear and consistent with the general principle that the duty of good faith requires an insured to act reasonably. What though is not so clear, is the extent to which the duty of good faith requires an insured to:

An insured, confronted with an insurer’s investigation of the notified insurance claim and request for cooperation under the insurance policy’s claims cooperation clause, may seek separate legal advice on its obligation to cooperate and volunteer information, because such information may be contrary to its interests. This could be especially so, if the insurer to avoid any conflict of interest, instructs one lawyer on the insurer’s behalf and a different lawyer to act on the insured’s behalf. This is often a prudent course, but does such legal advice also need to be produced to the insurer and its ‘coverage counsel’?

The duty of utmost good faith clearly requires an insured to provide relevant information, but the limited Australian authorities on point do not indicate whether this obligation extends to the production of legally privileged information. Although not clear cut, the better view appears to be that the extent of the insurer’s entitlement to legal advice/materials will ultimately be governed by the terms of the policy.

Such an outcome appears to be the cumulative effect of the following decisions:

The relevant authorities in the United States are much more numerous, but to the same effect, namely, that an insured’s obligation to provide material which is subject to legal professional privilege, will primarily turn on the terms of the information and/or cooperation clauses in the policy of insurance. However, the United States authorities are now quite clear that the production of such material will normally only be ordered when it is not contrary to the insured’s interests (in other words, indemnity has been granted and therefore this can be done in the ‘common interest’ of insured and insurer, without the waiver of legal professional privilege which this entails). See, for example:

  1. Re Environmental Ins Actions 612 A 2d 1338 (NJ Super AD 1992) in which Judge Thomas, in delivering the majority opinion of the court, held:
    1. cooperation clauses in insurance policies impose a duty on insureds to assist insurers in the conduct and defence of actions and to that end, insureds are generally required to provide all such information and assistance as the insurer may require (at 514.17)
    2. the duty to cooperate imposed by an insurance policy should be limited to situations where insurers actually conduct or pay for the defence of underlying claims and actions. Otherwise, to afford insurers access to confidential defence information would enable them to both demand cooperation from their insured in defence of underlying actions and to disavow coverage (at 514.17).
  2. In Eastern Air Lines Inc v US Aviation 716 So 2d 340 at 343 (Fla App 3 Dist 1998), the Florida District Court of Appeal held that in Florida:
    1. the cooperation clause does not eviscerate the attorney–client privilege
    2. the cooperation requirement applies in Florida only when the insured and the insurer are in a fiduciary relationship; the insurer has the duty to operate in good faith, and the insured has the reciprocal obligation to allow the insurer to control the defence and to cooperate with the insurer, and
    3. where the fiduciary relationship does not exist and the parties are in an adversarial position—as in an action by an insured against an insurer for bad faith—the attorney–client privilege is not waived.
  3. It is notable that both of the previous cases expressly rejected the 1991 decision of the Supreme Court of Illinois: Waste Management, Inc v International Surplus Lines Insurance Co 579 NE 2d 322 at 329 (Ill 1991), in which it was held that insurers were entitled, pursuant to a cooperation clause in the insurance contract and under the common interest doctrine, to production of the insured’s files (over which it had claimed privilege), notwithstanding that the insurers did not participate in the insured’s defence of the claim.61
  4. Finally, in Metropolitan Life v Aetna Cas & Sur 730 A 2d 51 (Conn 1999), the Supreme Court of Connecticut held:
    1. disclosure by an insured pursuant to cooperation clauses could be required only if and when the insurer participates in the defence of underlying cases (at 63)
    2. upon the insurer’s anticipatory breach of its duty to insure the insured, the insured is freed from its obligations under the cooperation clause to the extent necessary to reasonably protect itself against the breach (at 64), and
    3. the implicit duty of good faith and fair dealing within each insurance contract should not be so expansive as to encompass the disclosure of otherwise privileged documents (at 64).

Absence of express term requiring information/cooperation by insured

Despite the common assumption and practice that an insured has an obligation to provide cooperation and therefore relevant information to an insurer, there is no clear legal authority to this effect. Therefore, in the absence of an express term in the contract of insurance, it is unclear whether the duty of utmost good faith imposes an obligation on the insured to provide information and assistance in relation to a claim.

An insurer who therefore trusts to the common assumption and expectation that such information will be provided, or fails to ensure the written terms in the contract of insurance clearly reflect its needs, could be quite disappointed. This is not to suggest that the better view is that the general obligations to act reasonably would not be held to impose an obligation to provide cooperation and information which is reasonably required.62 Such a conclusion is consistent with general good faith principles, as well as the principle that an insured must take reasonable steps to reduce or minimise its loss and the liability of the insurer.63

An ongoing obligation to provide information to the insurer

If an insured has a duty to provide information to an insurer in relation to the underwriting of a policy or a notification/claim: for how long, if at all, does such a duty continue post the event in question? In short, the once leading authority for a broad or positive interpretation of a continuing duty to disclose to the insurer all material facts, Black King Shipping Co v Massie (The ‘Litsion Pride’) [1985] 1 Lloyd’s Rep 437, is no longer good law in Australia, or in England where it was decided. It has been distinguished by the Supreme Court of New South Wales in NSW Medical Defence Union v Transport Industries Insurance (1985) 4 NSWLR 107. In that case, Rogers J held that the duty of good faith which continues throughout the term of the insurance does not require disclosure whenever a fact is known to the insured which would be material to an insurer in the making of a decision.

The ‘Litsion Pride’ was also disapproved by the House of Lords in Manifest Shipping Co v Uni-Polaris Shipping Co (‘The Star Sea’) [2001] 1 All ER 743. Lord Hobhouse (with whom Lord Steyn and Lord Hoffmann agreed) considered (at 762):

... there is a clear distinction to be made between the pre-contract duty of disclosure and any duty of disclosure which may exist after the contract has been made. It is not right to reason … from the existence of an extensive duty pre-contract positively to disclose all material facts to the conclusion that post-contract there is a similarly extensive obligation to disclose all facts which the insurer has an interest in knowing and which might affect his conduct. The courts have consistently set their face against allowing the assured’s duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith.

Lord Clyde (with whom Lord Steyn agreed) considered (at 748–9), that the substance of the duty of good faith varied during the course of an insurance policy:

In my view the idea of good faith in the context of insurance contracts reflects the degrees of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged. It is reasonable to expect a very high degree of openness at the stage of the formation of the contract, but there is no justification for requiring that degree necessarily to continue once the contract has been made.

Thus, not only the circumstances of each case are critical, but in this context, so is the precise stage of the insurance relationship. In other words, pre-contractual negotiations, conduct of investigation or claim, plus the course of litigation between insurer and insured. In The ‘Star Sea’, the insurer had argued, unsuccessfully, that the duty of good faith required the disclosure of information material to its decision to pay or defend a claim and that this duty continued even after litigation had commenced.

The decisions in Australia are to much the same effect. In Lampson (Aust) Pty Ltd v Ahden Engineering (Aust) Pty Ltd [1999] 2 Qd R 252 at 254, Moynihan J agreed with Young J in GIO Insurance v Leighton Contractors (1995) 9 ANZ Insurance Cases 61-293 that there is a ‘fundamental distinction between the pre-contractual duty of disclosure in utmost good faith of material facts and any obligations of that kind arising after the contract [has] come into force’. As a result, the insured’s contractor was under no post-contractual obligation by reason of the duty of good faith to disclose information relating to the question whether there was double insurance. Again, The ‘Litsion Pride’ was distinguished.64

The same conclusion was reached by the Supreme Court of the Northern Territory in Tropicus Orchids Flowers & Foliage Pty Ltd v Territory Insurance Office (1998) 148 FLR 441; 10 ANZ Insurance Cases 61-412. The insurer denied liability on the basis that the insured had breached a number of the terms of the policy and had also breached its duty of utmost good faith by failing to provide documents relating to relevant budgets, forecasts and projections that the insurer claimed it had requested during the course of investigating the claim. Mildren J held that the insured was not in breach of any express term of the policy in failing to supply the relevant documents as the insurer had not requested documents of that type. Moreover, disclosure of them was not necessary to enable the insurer to assess the insured’s loss. Mildren J also held that the duty of utmost good faith did not require the insured to produce information which was not required by the terms of the policy itself.65 

In NSW Medical Defence Union, an insurer sought to avoid liability under an insurance policy on the basis that during the currency of the policy the insured had failed to comply with its obligation to act in good faith by failing to disclose certain material facts during the currency of the policy. As noted, Rogers J accepted that the duty of good faith continued throughout the term of the insurance, but disagreed that the duty required disclosure wherever the insured is aware of a fact that would be material to an insurer in making a decision.

Should the insured’s claim for indemnity be disputed and litigation be commenced, the insured may be required by a discovery order made by the court to provide information to its insurer, which was not required under either the policy or the duty of good faith. In The ‘Star Sea’,66 the House of Lords held that once the parties are in litigation, it is the procedural rules which govern the extent of the disclosure which should be given in the litigation, not the duty of good faith in section 17a of the Marine Insurance Act 1906 (Eng). This is exhausted or superseded, although that section may influence the court in the exercise of its discretion.67 

Under the common law in England, it seems to be accepted that once an insured’s claim for indemnity is the subject of litigation between the insured and insurer, then, provided that the claim is not fraudulent, the obligations of utmost good faith come to an end at least insofar as the duty is subject to the litigation.68 There is no Australian authority to this effect and the question arises: is the Australian position different under section 13 of the ICA, given that the duty is an implied term of the contract? Generally, the duty of utmost good faith under the ICA will only end when all obligations under the contract of insurance have ceased.69 In the event of litigation, however, the position is presently unclear.

Conduct of claim

While the post-contractual duty of good faith has been recognised since the earliest of times,70 it has only been since the ICA in Australia71 and in the United Kingdom, ‘in the last 10–15 years that the duty has been sought to be explained in terms beyond a demurrer against fraud’.72 As a result, the extent to which the duty of good faith imposes obligations on insureds and insurers in the investigation and conduct of claims beyond a duty not to act fraudulently, is still emerging and developing in Australia (as it is in the United Kingdom, where the majority of cases still concern the pre-contractual duty of disclosure ).73

By now, it should not be a surprise to learn that in the United States, there has not been a shortage of cases in this area,74 but the principles which emerge from these decisions are much the same as in Australia; namely that an insurer’s obligations under the duty of good faith are to:

Subject to the exceptions listed below, the cases and instances in which it has been found that a good faith issue has arisen are not especially surprising and are consistent with the good faith principles outlined previously. Thus, if an insurer (or insured for that matter) acts honestly and reasonably throughout ‘in what they bona fide consider to be the common interest of themselves and the insured’ and not allow their judgment to be influenced by the hope of some advantage,78 then usually a problem should not arise. An insurer has a right to be reasonably wrong, both in the United States and Australia.79 

Conversely (though equally in accordance with good faith principles) Ambrose J noted in Gutteridge80 that the failure of the insurer to make and communicate within a reasonable time:

... a decision of acceptance or rejection of the [insured’s] claim for indemnity by reason of negligence or unjustified and unwarrantable suspicion as to the bona fides of the [insured’s] claim, may constitute a failure on the part of the [insurer] to act towards the [insured] ‘with the utmost good faith’ in dealing with their claim.

As noted, the conduct of the claim is a fertile field for bad faith claims against insurers in the United States.81 This potentially is also the case in Australia. Areas in which the law and insurers’ current practices might leave them exposed to such claims include:

Unusual exclusion clauses

Unusual exclusion clauses or their application in an unfair or unintended way, can and has attracted the ire of the courts and finding of a breach of the duty of good faith. Examples include:

  1. reliance by an insurer on an exclusion in a liability policy was not permitted for it was contrary to section 14 of the ICA and the duty of good faith. This decision arose because the terms of the exclusion were not intended to be contained in the policy, was not communicated to the insured and the policy premium was excessive, if the exclusion was relied upon: Baradom Constructing Pty Ltd v GIO General Ltd (unreported, Supreme Court, NSW, Allen J, 13 June 1996), and
  2. ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374, where an insurer and its solicitors had continued to represent the insured in legal proceedings when they considered that as the claim against the insured was in contract, the liability policy did not cover the claim. Indemnity was only declined after summary judgment was entered against the insured. Olson J held that the insured had been ‘deliberately kept in the dark’ and the lawyer’s conduct on instructions from the insurer was a gross breach of the duty of good faith, with the result that the insurer was not entitled to rely on any relevant contractual provision in the policy of insurance.

It is often said that extreme or bad fact cases make bad law. Whether or not that is so, there is no doubt that egregious or reprehensible behaviour on the part of insurers or their advisers, will generate developments and precedents in the sphere of good faith, which can have significant and adverse implications for insurers in their relationship and rights with insureds.

Exclusion clauses, their existence, interpretation and application are often crucial to whether insurance will cover a claim and are therefore a potential source of bad faith claims and dicta. Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) ANZ Insurance Cases 61-553 is such an example, where the crucial issue was whether the existence of an exclusion had been communicated to the insured through its broker. In considering these facts and the duty of the utmost good faith, Palmer J observed (at [25]–[29]) that an insurance policy:

... is not to be construed so as to allow the insurer to escape liability by means of any ambiguity which the ingenuity of its lawyers may tease from the words of the policy …
That principle is merely an application of the established doctrine that policies of insurance are to be construed ‘contra proferentem’: the Courts set their face against an insurer who, having drafted the terms of the policy which are imposed on the insured and having received premiums under that policy, possibly for years, then insists on construing an ambiguity in the terms in such a way as to deny liability. There are many strong judicial statements to this effect: see eg per Farwell LJ in In re Etherington & Lancashire & Yorkshire Accident Insurance Co [1909] 1 KB 591 at 600; Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14 at 22 per Isaacs J; Halford v Price (1960) 105 CLR 23 at 34 per Fullagar J.
That ambiguity in an insurance policy cannot operate to disadvantage the insured is a principle which is just as much to be applied by the Courts today as it ever was … [insurers] must remind themselves that a contract of insurance contains an implied term requiring the insurer to act towards the insured with the utmost good faith in respect to any matter arising under it: s 13 of the Insurance Contracts Act 1984 (Cth) (‘ICA’).
If insurance companies and their advisers do not bear these principles in mind, if they come to Court seeking to construe an exclusion out of ambiguous words or by recourse to implied terms, they may well face not only an adverse judgment almost out of hand, but also an indemnity costs order. This is so because it is notorious how dependent upon insurance many people are in order to protect them from the financial disaster that all kinds of insurable misfortunes can bring. If an insurance company denies liability on the basis of ambiguous wording or implied terms in the policy, necessitating a Court case to resolve the issue, the lives and wellbeing of those insured may be destroyed before the case is concluded, particularly if they are of modest means: a victory for the insured may, in the end, prove Pyrrhic indeed in human terms.
The Courts do not remain indifferent to reprehensible behaviour on the part of a party to litigation, whether that behaviour occurs in the genesis of the dispute or in the conduct of the litigation. The Court may express its disapproval of such behaviour in the form of an indemnity costs order. Insurers and their advisers need to weigh this consequence carefully before they rely upon ambiguous words or implied terms in an insurance policy in an attempt to exclude cover and deny liability.82

Conflicts of interest

On receipt of a notification of a circumstance, an insurer may instruct a lawyer (and or loss adjuster/assessor) to provide advice to the insurer as required. It is also not uncommon for the same lawyer to seek information from the insured who notified the claim, and to answer questions about the claim notification process. If the notified circumstance concerns a third party claim and the third party claimant institutes legal action, it is also quite common for the insurer’s lawyer to be instructed by the insurer to represent the insured, with or without a reservation of rights.

The extent to which such industry practices give rise to a conflict of interest have been the subject of much judicial comment and decision, which do not need to be revisited here. However, the extent to which such practices could attract a bad faith claim from insureds should be briefly considered.

Where conflicts of interest arise as between an insurer and an insured, the insurer must exercise its power under the policy with due regard for the interests of the insured. An insurer must act in good faith towards the insured and must have regard to their interests both in defensive actions against the insured and in their settlement.83

The scope for a conflict of interest for, say an insurer or its lawyer, in investigating a notified claim for the insurer and then answering the insured’s questions about the terms of the policy or the information which has been requested, are quite clear and understandably difficult to manage. Often the insured, as well as the insurer or its adviser, would be respectively better off and less at risk, if the insured had access to independent advice.

Managing the potential conflicts in relation to a notified circumstance or claim under a first party policy of insurance is difficult enough. Attempting to do so where there is a third party claim and indemnity has been sought under, say a liability policy of insurance, is particularly fraught with difficulties and risks for the insurer and its appointed lawyer if the insurer adopts the practice of appointing a lawyer to both investigate the question of insurance coverage and to also, with a full reservation of rights, represent the insured and insurer in respect of the third party claim.

The law of fiduciary duty requires that a lawyer must avoid a situation of conflict between their duty to one client, and their duty to another client.84 This rule is a manifestation of a fiduciary’s over-riding duty of undividing-loyalty.85 Thus, in Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, Richardson J said:

A solicitor’s loyalty to his client must be undivided. He cannot properly discharge his duties to one whose interests are in opposition to those of another client … But the acceptance of multiple engagements is not necessarily fatal. There may be an identity of interests or the separate clients may have unrelated interests. Such cases seem straightforward so long as it is apparent that there is no actual conflict between duties owed in each relationship.86

It follows that a lawyer trying to represent clients with potentially different interests, such as the practice described of a lawyer being appointed by an insurer to fulfil the dual roles of advising the insurer on policy coverage and representing the insured in the defence of a third party claim, potentially runs the risk of a conflict of interest. So it was established in ACN 007 838 584 v Zurich and Nicholson v Icepak Coolstores Ltd (1999) 10 ANZ Ins Cas 61-449, where in each case the lawyer continued to act despite being aware of or having received information that would have enabled the insurer to deny indemnity.

One of the stark contrasts in a comparison of the law and practices of insurers in the United States and Australia is that in the United States this practice rarely occurs.87 Rather, due to concerns of a conflict of interest and the breach of the duty of good faith which this may entail, the common practice is that a tripartite relationship exists:

(1)an insured who is covered by a liability insurance policy; (2) the insurer who has the duty to indemnify the insured and to provide a defence under the policy; and (3) the defense lawyer who is employed by the insurer to defend the insured against a claim which may be covered by the policy.88 

This tripartite approach solves the problem, in that the insurer appoints its own lawyer (usually referred to as coverage counsel, for the principal role is to advise the insurer whether cover should apply) and it also appoints and meets the costs of a lawyer to solely and independently represent the insured (‘defense counsel’). I understand many States of the United States have a similar practice to that of Florida, where the Florida Supreme Court requires a ‘Statement of Insured Client’s Rights’ to be issued, so that the insured is fully informed of what the appointment of ‘defense counsel’ entails.

Certainly in order to avoid the risks of a conflict of interest and the potential for breach of the duty of utmost good faith, such a practice is desirable.89

Of course, a conflict of interest can arise in other circumstances for an insurer. Apart from the instances already considered, a further and recent example concerns an insurer’s purported discretion to advance defence costs (such as in a directors and officers insurance policy) subject to a refusal to confirm indemnity under the policy of insurance. These were some of the issues before the High Court of Australia in Wilkie v Gordian Runoff Ltd (2006) 79 ALJR 872; 214 ALR 410 and Rich v CGU Insurance Ltd; Silbermann v CGU Insurance Ltd (2005) 79 ALJR 856; 214 ALR 370. Callinan J in both decisions expressed concern about the insurer’s conflict in the construction of the policy which they advocated, in that the application and withholding of defence costs under such an interpretation would deprive the insured of the opportunity of defending himself and could influence, if not effectively make the insurer the arbiter of the engagement of the policy exclusion upon which the insurer was relying, to the insurer’s advantage.

Insured’s remedies for breach of the duty of good faith

It has previously been observed that egregious or reprehensible behaviour on the part of insurers can generate developments which can have significant and adverse implications for insurers’ current practices and/or relationship with insureds.

In the sphere of remedies, it should not be forgotten that in the award of interest to the plaintiff in Ruby v Marsh (1975) 132 CLR 642 at 652-653 per Barwick CJ, the High Court recognised that an award of interest on the verdict sum was appropriate and reflected one of the purposes of such a power in the courts to award interest, so as

to provide a discouragement to defendants, who in the greater number of actions for damages for personal injuries are insured, from delaying settlement of the claim or an early conclusion of proceedings so as to have over a longer period of time the profitable use of the money which ultimately the defendant agrees or is called upon by judgment to pay.90

Similarly, the extent to which an insured’s remedies for breach of the duty of good faith develop, will to a large extent be influenced by the conduct of insurers and the circumstances which come before the courts.

Under the ICA, the damages for a breach of the duty of good faith are based on ordinary contractual principles91 and are assessed, as best can be done, to put the party back into the position in which they would have been, but for the breach.92

Section 12 of the ICA has the effect that Part II cannot be read down,93 but it does not codify the remedies for breach of the duty of good faith. Therefore, theoretically at least, there could be occasions in which remedies at common law for a breach of the duty of good faith could be considered for contracts of insurance governed by the ICA, as well as for contracts of insurance falling outside its ambit.94

The common belief and approach though is that, leaving aside contracts of insurance which fall outside the ambit of the ICA, the remedies for breach of the duty of utmost good faith, are effectively codified and limited to those set out in the ICA. So far as insurers are concerned, this is pretty much the case. Again however, the ICA reflects the consumer bias and intent of the Act, with its provisions being much more restrictive about the rights and remedies of insurers, than insureds.

Examples of this dichotomy and dual approach to insurers and insureds are:

The insured therefore enjoys the benefits and relief provided by the ICA in respect of breach of the duty of utmost good faith, but can, much more so than the insurer, also have resort to common law remedies. As a result, if the facts and circumstances of the breach of good faith warranted it, an insured may (without seeking to be exhaustive):

In Gibson v Parkes District Hospital (1991) 26 NSWLR 9 at 34–5, Badgery-Parker J noted that in considerations of public interest, the tort of bad faith could arise as a matter of fact and law.103 In the decade since, no action for the tort of bad faith has succeeded and the clearest example of a court declining to follow Gibson in recognising a tort of bad faith is Gimson v Victorian Workcover Authority [1995] 1 VR 209. In so deciding, McDonald J stated in his review of Badgery-Parker J’s judgment in Gibson that he agreed with the reasoning that in light of various authorities, including Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 and the decisions on appeal to the Court of Appeal and House of Lords in that latter case:

... it is not open to this Court to hold that a contract of insurance (except by virtue of the provisions of s 13 of the Insurance Contract Act 1984 (Cth), not here relevant) contains an implied term that the parties will deal fairly and in good faith. Nor is there in this jurisdiction any general principle by which a duty of good faith is implied in every contract.

His Honour concluded:

... that there is no basis in law which could give rise to the conclusion that circumstances may exist giving rise to a common law duty which is imposed on a person to act in good faith in that person’s dealings or relationship with another, the breach of which would give rise to a remedy for damages in tort.
It is unnecessary to delve into the interesting debate as to whether this is correct, given this article’s focus on whether the law of the duty of good faith is yet settled in this country and the scope for it to develop further. Suffice to say that there is the potential for such a cause of action to be pleaded (if not found) in the appropriate circumstances.

Conclusion: Good faith — a defensive shield and sword?

At the outset this article posed the question: why has the issue of good faith arisen so comparatively rarely in Australia, especially when compared to the United States experience? In asking this question, it was recognised that the answer could lie anywhere between an explanation that the insurance relationship in Australia between insurer and insured is conducted fairly, through to the fact that contrary to popular perceptions, commentary and practice, the duty of utmost good faith has not yet come of age in Australia.

Although there are many explanations for why insurance bad faith claims are among America’s highest and most common damage claims, the history of these damage awards reveal that the actions have often arisen to address real or perceived dishonest and unfair practices of insurers.105 There is little doubt that similarly faced with egregious conduct of insurers, Australian courts will react in much the same way, albeit without the imposition of punitive damage awards.

What does the future hold? Who can confidently say. The scope for the duty of the utmost good faith to be applied more broadly and frequently than it has in Australia,106 means that at present it is something of a ‘sleeper’ of insurance remedies. Theory and scope aside, the reality is probably that the extent to which the duty of utmost good faith develops in this country, will be largely determined by the conduct of the insurance industry.

However, what has probably not been fully appreciated by insurers and insureds alike, is the scope and scale for the duty of good faith to not just be utilised as a shield against the ‘unfair’ practices of insurers, but to also be used as an offensive weapon to secure full and fair performance of the contract of insurance entered into by insureds with insurers. 

Table 1: Comparative analysis

United States 

Australia 

Communication
  • Pertinent advice about coverage issues
  • No misrepresentations as to policy 
 Policy — pre-inception
  • Drafting of policy terms
  • No misrepresentations as to policy terms
Investigation
  • Timely and prompt
  • Thorough, fair and balanced
  • Duty to keep insured informed
  • Failure to affirm or deny within reasonable period of time 
 Investigation of insurance claim
  • Timely and prompt
  • Thorough and fair
  • Duty to keep insured informed
  • Failure to affirm or deny within reasonable period of time 
Decisions and timing issues
  • Duty to keep informed
  • Decisions have reasonable basis
  • Litigation post loss
    • exclusion clauses
    • insurer conduct 

Conduct of claim 

  • Duty to keep informed
  • Decisions are fair
  • Litigation post loss
    • unusual exclusion clauses
    • conflict of interest 
Insured’s relief

Common law
  • Contract
  • Tort of ‘bad faith’

Statutory

  • Various at state level 

Insured’s relief 

Common law

  • Contract
  • Tort of ‘bad faith’

Statutory

  • ICA
  • Other  

Table 2: Insurance industry codes of practice

 

Australia107 

United States108 

1  Handle claims honestly and fairly109  Judiciously investigate claims 
2  Efficiently evaluate claims110  Efficiently evaluate claims 
3  Inform the insureds of the progress of the claim111  Inform the insureds of all settlement negotiations 
4   Notify the insured of the likely outcome of litigation 
5  Advise the insured if it is likely that the cost of a claim will exceed the applicable limit of indemnity under the policy112   Forewarn the insured of the possibility of a decision exceeding the policy and counsel the insured in relation to any action they could take to avoid that occurrence 
6  General Insurance Code of Practice will be applied having regard to the duty of utmost good faith113    Conduct themselves having regard to the interests of the insured 
7    Reasonably consider any equitable offer of settlement and to accept that offer where it would be reasonably prudent to do so, given the possibility of paying the total indemnity 
8  Consider the obligation of an insured to meet a liability not covered under the policy, in a manner consistent with the duty of good faith114  Furnish a legitimate defence and to appeal an adverse decision where good faith requires such action be taken 
9    Exercise care when providing a legal defence 
10  Take care to ensure claims are assessed by reference to the relevant considerations and information115 Use due skill and care when adjusting claims 

Footnotes

*This article was first published in the Australian Law Journal.

  1. See, eg Finn, ‘Good Faith and Fair Dealing: Part 1’ (1990) 5(9) Australian Insurance Law Bulletin 101 at 102.
  2. See Hawke F, ‘Utmost Good Faith – What Does It Really Mean?’ (1994) 6(2) ILJ 91 at 93.
  3. See Insurance Contracts Act 1984 (Cth), section 13; Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675. 
  4. For examples of this apparent perception see: Gill M and Radford M, ‘Utmost Good Faith – The Coming of Age’ (1994) 10(1) Australian Insurance Law Bulletin 1; Hawke, n 2 at 141.
  5. There are of course a number of different insurance contracts which are not governed by the Insurance Contracts Act 1984 (Cth), see section 9. The vast majority of contracts of insurance entered into within Australia are governed by the Act and it is to those arrangements to which this article is directed.
  6. Explanatory Memorandum to the Insurance Contracts Bill 1984, para 30.
  7. See Hawke, n 2, esp at 94–100, 141–2 for an outline of some of this analysis.
  8. Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (Priestley JA).
  9. Sutton, Insurance Law in Australia (3rd ed, LBC, 1999) p 158, citing in support: Lucke, ‘Good Faith and Contractual Performance’ in Finn (ed), Essays on Contract (1987) pp 155, 160 et seq; Hawke, n 2 at 94 et seq; see also AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCR 447 at 475 and Service Station Assoc Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; 117 ALR 393 at 401-407 (discussion of the concept in the common law of contract).
  10. On appeal this aspect was not disturbed, with Owen J finding that there was no ‘dishonest, capricious or unreasonable conduct by the insurer’: Kelly v New Zealand Insurance Co Ltd (1996) 9 ANZ Insurance Cases 61-317 at 76,520. 
  11. Kelly v New Zealand Insurance Co Ltd (1996) 9 ANZ Insurance Cases 61-317.
  12. In AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCR 447 at 475 Emmett J noted to the same effect that while want of honesty will constitute a failure to act with the utmost good faith, want of honesty was not an essential requirement for breach of the duty. Rather, the notion of good faith ‘entails acting with honesty and propriety … [f]urther utmost good faith involves something more than mere good faith’.
  13. Generally, the Australian courts have come to regard reasonableness as a key ingredient of good faith in contract law: Carter and Peden, ‘Good Faith in Australian Contract Law’ (2003) 19 JCL 155; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 258; Hillas & Co Ltd v Arcos Ltd [1932] All ER 494 at 507 (Lord Wright).
  14. See Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 at [159], [172], [185]; see also Carter and Peden, n 12.
  15. Brown J and Harwood S, ‘Food for Thought .... Where lies the Pendulum between the insurer and the policyholder on the scale of duties of good faith’, paper presented to the 2002 National Australian Insurance Law Association Conference, Melbourne, October 2002; Houser D, ‘Good Faith As a Matter of Law: The Insurance Company’s Right to be Wrong’ (1992) 27 Tort & Ins LJ 665; Houser DG, Clark RJ and Bolduan LM, ‘Good Faith as a Matter of Law – The Insurance Company’s Right to Be Wrong. What Have the Courts Done in the Past Ten Years?’, paper presented to the 2004 Defense Research Institute, Barcelona, May 2004.
  16. Most notably Janet Brown in preparation for and post my commentary on her paper (Brown and Harwood, n 14); Douglas Houser in collaboration for the presentation of papers on the duty of good faith to the Defense Research Institute seminar, ‘International Liability – New Theories of Liability from the United States. Will You Be Ready?’ Sydney and Melbourne, November 2004.
  17. I recognise of course that in Australia the duty is properly regarded as the ‘duty of utmost good faith’, whereas in the US it is usually referred to as ‘good faith’, if not bad faith claims. Therefore as a compromise when discussing the law in both countries, I have referred to it simply as the duty of ‘good faith’. 
  18. Houser D, address to the Defense Research Institute seminar, ‘International Liability – New Theories of Liability from the United States. Will You Be Ready?’ Melbourne, November 2004.
  19. For example, the Defense Research Institute publication, Insurance Bad Faith runs to 345 pages (and does not purport to be comprehensive)) whereas Mann, Annotated Insurance Contracts Act (4th ed., 2003) commentary on the duty of good faith understandably only runs to 22 pages.
  20. Mann, n 19, pp 32–54 (lists approximately 40 cases in the commentary on the duty of good faith, including relevant common law decisions).
  21. For a full breakdown of the claim statistics and damage awards, see http://www.rand.org/icj (Rand Institute for Civil Justice). Of course, statistics can be made to prove almost anything—‘damned lies and statistics’—but it is interesting to note that Kent N, ‘Insurer Bad Faith Damages: A USA-Canada Comparison’ (unpublished paper) cites a report prepared by General Cologne Re (Harris and Stein, ‘The Cost of Bad Faith Claims for US Insurers’ (2003)) and summarises its findings as: ‘[1] more than half of bad faith claims against insurers in the US succeed; [2] while average awards for compensatory damages range from $600,00 to $1 million, the average punitive damage award is ten times that figure, from nearly $7 million to $10 million; [3] bad faith findings on third party liability policies account for the highest damage awards; but [4] claims for first party policies account for most of the volume in bad faith litigation’.
  22. Carter v Boehm (1766) 3 Burr 1905 at 1909; 97 ER 1162 at 1164 per Lord Mansfield: ‘Insurance is a contract based upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.’
  23. Explanatory Memorandum to the Insurance Contracts Bill 1984, para 70 explained for Insurance Contracts Act 1984 (Cth), section 12: ‘good faith is in fact the paramount duty. It is not displaced or read down by any other duties which the Act imposes.’
  24. Insurance Contracts Act 1984 (Cth), section 12.
  25. Explanatory Memorandum to the Insurance Contracts Bill 1984 , para 30 explains for Insurance Contracts Act 1984 (Cth), section 12: ‘the duty of the insured to disclose all material facts of which he is aware is not to be rendered more onerous by the operation of this clause … the duty of disclosure expressed in clause 21 will, in fact, be as much as the duty of the utmost good faith would require’; see also CIC Insurance Ltd v Barwon Region Water Authority (1999) 10 ANZ Insurance Cases 61-425 at 74,774.
  26. Although Insurance Contracts Act 1984 (Cth), section 33 provides that Division 3 of Part IV is exclusive of all remedies in respect of disclosure prior to the contract was entered into, this provision again only applies to ‘the insurer’.
  27. Explanatory Memorandum to the Insurance Contracts Bill 1984, para 20 explained for Insurance Contracts Act 1984 (Cth), section 12: ‘the duty of the insured to disclose all material facts of which he is aware is not to be rendered more onerous by the operation of this clause … the duty of disclosure expressed in cl 21will, in fact, be as much as the duty of the utmost good faith would require’; see also CIC Insurance Ltd v Barwon Region Water Authority (1999) 10 ANZ Insurance Cases 61-425 at 74,774. 
  28. Sutton, n 9; Hawke, n 2 at 94 et seq; see also Service Station Assoc Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; 117 ALR 393 at 401-407 (discussion of the concept in the common law of contract).
  29. Cited with approval by Walsh J in Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Insurance Cases 61-197 and in the same case on appeal, as it was in the finding in Vermeulen v SIMU Mutual Insurance Assoc (1987) 4 ANZ Insurance Cases 60-182 that a core aspect of good faith in an insurance claim was ‘honesty’.
  30. Generally, the Australian courts have come to regard reasonableness as a key ingredient of good faith in contract law: Carter and Peden, n 12; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 258; Hillas & Co Ltd v Arcos Ltd [1932] All ER 494 at 507 (Lord Wright).
  31. As Moffit J pointed out in Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 at 74, in a case concerning auditors, ‘Reasonable skill and care calls for changed standards to meet changed conditions or changed understandings of dangers and in this sense standards are more exacting today than in 1896 … It is not a question of the court requiring higher standards because the profession has adopted higher standards. It is a question of applying the law, which by its content expects such reasonable standards as will meet the circumstances of today, including modern conditions of business and knowledge concerning them.’ Similarly, in Donoghue v Stevenson [1982] AC 562, Lord Atkin said: ‘The liability for negligence … is no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay’.
  32. Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162 at 1164.
  33. See McConvill J, An Introduction to CLERP 9 (2004) p 22: ‘recent developments in corporate governance, including implementation of the [ASX] Best Practice Recommendations, mean that ‘contemporary community expectations’ of directors are to be much higher than was previously the case’. In relation to increased expectations regarding corporate governance generally, Jeffrey Lucy, commented while he was the Acting Chairman of ASIC (he is now the Chairman): ‘in recent years there has been ever greater pressure internationally on standards of corporate governance, audit and disclosure, with consequent scrutiny of the reactions and performance of regulators and law enforcement agencies whose task it is to encourage, facilitate, enforce and police compliance with these standards. We also have increased political, public, industry and business expectations, that [ASIC] will respond quickly when misconduct is detected; but also that we will prevent the misconduct – or at least minimise it – as well as punish. The collapses or difficulties of entities like HIH, Enron, Worldcom and Parmalat have moved regulatory issues higher up on the public agenda, particularly as they relate to disclosure and audit. Reform of standards, standard setting and regulatory structures are under active public discussion, here and in many other countries’: Lucy J, ‘FSR, CLERP 9 and surveillance programs: ASIC priorities over the next 12 months‘ (speech presented to the Institute of Chartered Accountants in Australia, 13 March 2004).
  34. The additional obligations imposed by CLERP 9 are helpfully summarised in McConvill, n 32, p 221. Some of the more onerous obligations for example relate to auditor independence and the managing of conflicts of interest.
  35. For example, HIH Insurance Ltd in Australia, Independent Insurance Company and TUIC (The Underwriting Insurance Company) in the UK, Reliance Insurance Company in the US, to name but a few.
  36. See comparative analysis table at the conclusion of this article and in particular see Toy v Metropolitan Life Ins Co 863 A 2d 1 (Pa Super Ct 2004); cf Bass v Great American Ins Co2004 WL 2165386 (Conn Super Ct, Aug 26, 2004).
  37. Kelly v New Zealand Insurance Co (1993) 7 ANZ Insurance Cases 61-197 at 78, 258.
  38. Sheldon v Sun Alliance Ltd (1989) 53 SASR 97 at 152; Gutteridge v Commonwealth (unreported, Supreme Court, Qld, Ambrose J, 25 June 1993).
  39. Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145 at 154 (Bollen J).
  40. Sutton, n 9, p 167.
  41. Moss v Sun Alliance Australia (1990) 55 SASR 145 at 154-155.
  42. Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurance Cases 61-235 at 75,646. Instructions to counsel which involved a conflict of interest and duty were to be avoided.
  43. Groom v Crocker [1939] 1 KB 194 at 203, 223; Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 29, 31; Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurance Cases 61-235 at 75,643 (cited in ACN 007-838-584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374 at 397).
  44. Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Insurance Cases 61-113 at 77,536; Hannover Life Re v Sayseng (2005) 13 ANZ Insurance Cases 90-123; Chammas v Harwood Nominees Pty Ltd (1993) 7 ANZ Insurance Cases 61-175 at 77,999; cf Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 6 ANZ Insurance Cases 61-032; Boman Industries Pty Ltd v Export Finance & Insurance Corp (1990) 6 ANZ Insurance Cases 60-972 at 76,478 (the duty is only one of the obligations and must be conditioned by the express terms of the policy).
  45. Komorowski v Australian Associated Motor Insurers (1996) 9 ANZ Insurance Cases 61-303 at 76,380.
  46. In Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 at 704 (Giles J), it was held that there was no lack of good faith (though note this case concerned a reinsurance contract subject to the Marine Insurance Act 1909 (Cth)).
  47. The following cases dealt with this in the context of an insured providing a detailed statement in writing under the insurance contract: L’Union Fire Accident and General Insurance Co Ltd v Klinker Knitting Mills Pty Ltd (1938) 59 CLR 709 at 718, 722, 727 (also cited in Norwood v Ian Dickson Ltd (1993) 7 ANZ Insurance Cases 61-176 at 78,005).
  48. Houser, n 17.
  49. Vanguard Insurance Co Ltd v Darley Trading Pty Ltd (1981) ANZ Insurance Cases 60-439 (Needham J).
  50. Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145, though Bollen J suggested that but for the insured’s delay, a reasonable time could have been two months within the date of the fire.
  51. Protean (Holdings) Ltd v American Assurance Co Ltd (1986) ANZ Insurance Cases 60-683.
  52. Stuart v Guardian Royal Exchange Assurance of New Zealand Ltd [No 2] (1988) 5 ANZ Insurance Cases 60-844.
  53. See Hartford Insurance Co v County of Nassau 389 N.E.2d 1061 (N.Y.1979); Fire Insurance Exchange v Fox 423 N.W.2d 325 (Mich. App. 1988); Gulf Insurance Company v State 607 P.2d 1016 (Colo. App. 1979); Garnett v Transamerica Ins. Services 800 P.2d 656 (Idaho 1990).
  54. Sutton, n 9; Hawke, n 2 at 94 et seq; see also the discussion of the concept in the common law of contract in Service Station Assoc Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; 117 ALR 393 at 401-407.
  55. See Protean (Holdings) Ltd v American Assurance Co Ltd [1985] VR 187; (1986) ANZ Insurance Cases 60-683 at 74,059 where Marks J although acknowledging the need for an investigation, noted that ‘what was justified was less a wide-ranging thrashing about for information which would delay payment or defeat the claim, but a reasoned research for material necessary to determine if the claim was justified.’ This conclusion is also consistent with the approach in the United States: see Mariscal v Old Republic Life Ins Co 50 Cal Rptr 2d 224 (1996) (10). In Australia, it also seems to be well accepted that insurers must throughout act ‘in what they bona fide consider to be the common interest of themselves and the insured’ and may not allow their judgment to be influenced by the hope of some advantage or an ‘ulterior purpose’ . See AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCR 447 at 475, 476; Groom v Crocker [1938] 2 All ER 394; [1939] 1 KB 194; Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd (1970) 130 CLR 1; Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235.
  56. Carter v Boehm (1766) 3 Burr 1905 at 1909-1910; 97 ER 1162 at 1164.
  57. Cook v Scottish Imperial Insurance Co (1884) 5 LR (NSW) L 35; L’Union Fire Accident & General Insurance Co Ltd v Klinker Knitting Mills Pty Ltd (1938) 59 CLR 709 at 717-720 (Latham CJ), 724 (Starke J), 725 (Evatt J).
  58. Hiddle v National Fire & Marine Insurance Co of New Zealand [1896] AC 372 at 375-6; (1896) 17 LR (NSW) 46; L’Union Fire Accident & General Insurance Co Ltd v Klinker Knitting Mills Pty Ltd (1938) 59 CLR 709 at 724 (Starke J), 725 (Evatt J).
  59. Challenge Finance Ltd v State Insurance General Manager [1982] 1 NZLR 762 at 766-767 (cited in Norwood v Ian Dickson Ltd (1993) 7 ANZ Insurance Cases 61-176 at 78,005); consistent with Latham CJ’s approach in L’Union Fire Accident & General Insurance Co Ltd v Klinker Knitting Mills Pty Ltd (1938) 59 CLR 709 at 718.
  60. The High Court has held in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514 that under Insurance Contracts Act 1984 (Cth), section 21 an insured is only under a duty to disclose matters that are relevant to the insurer accepting the risk (ie the particular insurance hazard) and that the focus of the section ‘is not, as such, upon the much broader question of the commercial willingness of the insurer to accept the risk, still less emotional or individual reactions to that question’ (at [32]).
  61. The court held in that case that even though counsel for the insureds was not appointed by the insurers or even jointly appointed with the insureds, ‘in a limited sense, counsel for the insureds did represent both the insureds and insurers in both of the underlying litigation since insurers were ultimately liable for payment if the plaintiffs in the underlying action received either a favourable verdict or settlement’.
  62. See Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurance Cases 61-235; National Insurance v Van Gameren [1986] 2 NZLR 374 at 379; see also Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162 at 1164 per Lord Mansfield: ‘good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact, and his believing the contrary’.
  63. Newnham v Baker [1989] 1 Qd R 393 at 399 (cited with approval in Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203 at [37].
  64. The decision in Lampson is criticised in Kelly & Ball Principles of Insurance Law, 8.0080.20, where the authors argue that the issue is not whether the duty of disclosure when entering into an insurance contract extends beyond that time, but rather whether there is a duty of disclosure in relation to a claim.
  65. This decision is questioned in Kelly & Ball Principles of Insurance Law, 8.0080.30, where the authors point out that the duty of utmost good faith ‘is left with little to operate on if it is limited to complying with the terms of the contract’.
  66. Manifest Shipping Co v Uni-Polaris Shipping Co (‘The Star Sea’) [2001] 1 All ER 743 at 770.
  67. Marine Insurance Act 1906 (Eng), section 17 is in similar terms to Insurance Contracts Act 1984 (Cth), section 13, although it allows a party to avoid the policy if the duty of utmost good faith is not observed by the other party whereas s 13 gives rise to a claim of damages. 
  68. Eggers and Foss, Good Faith and Insurance Contracts (LLP, 1998), [3.69]-[3.70], [12.47].
  69. See Sutton, n 9, [3.171]: ‘[i]t is submitted that the insured’s duty to act with the utmost good faith will include not only full disclosure up to the date of entry into the contract but will also embrace the disclosure of relevant facts during the existence of the contractual relationship between the parties’; see also Mann, n 18, [13.10.5]. 
  70. Shepherd v Chewter (1808) 1 Camp 274 at 275.
  71. See ALRC 20, para 328; Insurance Contracts Act 1984 (Cth), s 13.
  72. Eggers and Foss, n 68, p 50.
  73. Eggers and Foss, n 68, p 50.
  74. ‘Post-loss problems seem to generate more problems in the context of insurer good faith than do pre-loss difficulties ... include failure to acknowledge receipt of claim, failure to timely and thoroughly investigate [and] post-litigation behaviour’: Brown and Harwood, n 14, pp 23, 27.
  75. As to the insurer’s obligation to keep the insured informed about relevant facts during the course of the contract relationship, see Sutton, n 9, [3.171]. In relation to the insurer’s obligation to communicate its decision regarding indemnity within a reasonable time, see Gutteridge v Commonwealth (unreported, Supreme Court, Qld, Ambrose J, 25 June 1993) p 11. In relation to the insurer’s obligation to disclose adverse materials such as medical and private investigator’s reports so that the insured can respond to those materials before the insurer makes its decision, see Hannover Life Re v Sayseng (2005) 13 ANZ Insurance Cases 90-123; Beverley v Tyndall Life Insurance Co Ltd (1999) 10 ANZ Insurance Cases 61-453.
  76. See Beverley v Tyndall Life Insurance Co Ltd (1999) 10 ANZ Insurance Cases 61-453 in relation to the insurer’s obligation to act fairly and reasonably in the assessment and determination of whether the insured made out a claim under the policy; see also McArthur v Mercantile Mutual Life Insurance Co Ltd [2001] QCA 317; (2001) 11 ANZ Insurance Cases 61-501 at 55; Wyllie v National Mutual Life Association of Australasia Ltd (unreported, Supreme Court, NSW, 50094/96, 18 April 1997).
  77. Distillers Co Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 26-27 (Stephen J); Groom v Crocker [1938] 2 All ER 394; [1939] 1 KB 194.
  78. Groom v Crocker [1938] 2 All ER 394; [1939] 1 KB 194.
  79. See Houser DG, Clark RJ and Bolduan LM, ‘Good Faith as a Matter of Law – An Update on the Insurance Company’s ‘Right to Be Wrong’ ‘ (2004) 39(4) Tort Trial & Insurance Practice Law Journal 1045; and in Australia, Komorowski v Australian Associated Motor Insurers (1996) 9 ANZ Insurance Cases 61-303 (NSW Sup Ct) at 76,380.
  80. Gutteridge v Commonwealth (unreported, Supreme Court, Qld, Ambrose J, 25 June 1993) p 11.
  81. ‘Post-loss problems seem to generate more problems in the context of insurer good faith than do pre-loss difficulties ... include failure to acknowledge receipt of claim, failure to timely and thoroughly investigate [and] post-litigation behaviour’: Brown and Harwood, n 14, pp 23, 27.
  82. See also Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) ANZ Insurance Cases 61-553 at [46], [67]. The decision of Palmer J was upheld on appeal: QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (2002) ANZ Insurance Cases 61-553. 
  83. Distillers Co Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 29 (Stephen J); ACN 007 838 584 Pty Ltd v Zurich Australia Insurance (1997) 69 SASR 374; 193 LSJS 406.
  84. Beach Petroleum NL v Kennedy [1999] 48 NSWLR 1 at 47.
  85. Beach Petroleum NL v Kennedy [1999] 48 NSWLR 1 at 47; Breen v Williams (1996) 186 CLR 71 at 135.
  86. Cited with approval in: Beach Petroleum NL v Kennedy [1999] 48 NSWLR 1 at 47; Maguire v Makaronis (1997) 188 CLR 449 at 465. 
  87. Indeed, various prominent United States insurance lawyers have responded with horror and surprise at the practice and the risks it entailed for lawyers and their insurers. In this respect, many thanks to Janet Brown and Susan Harwood for their assistance with my research into this issue.
  88. Morrison and Olds, ‘Economics, Exigencies and Ethics: Whose Choice? Emerging Trends and Issues in Texas Insurance Defense Practice’ (2001, Spring) Baylor Law Review 20.
  89. I appreciate that the appointment by an insurer of one lawyer to fulfil the dual roles of advising the insurer on policy coverage and to represent the insured in any litigations, achieves considerable cost reduction and efficiencies. Furthermore, in order to manage the risks which this dual role involves, reservation of rights letters and the consent of the insureds is sought, in an attempt to minimise these problems. Whether it does so is beyond the scope of this article, except to say that such practices are ultimately always at risk of being unwound to the expense of insurer and lawyer alike, if a conflict of interest arises. Like all risk minimisation initiatives, at best it cannot be completely successful. See generally Gray G, ‘Conflicts and Waiver of Privilege in the Insurance Relationship’ (1998) 10 ILJ 75 (citing CI & D Industries Pty Ltd v Keeling (unreported, Supreme Court, NSW, Abadee J, 26 March 1997) in which Abadee J made the following observation in dicta regarding the effectiveness of the non-waiver letter considered in that case: ‘this is not the occasion to also explore whether, it is an answer to what might be said to be a breach of duty by a fiduciary (to protect confidential information) to consider the presence or otherwise of informed consent on the part of [the insured]. Without so deciding, it does seem to me that in any event, the solicitors’ letter of 23 July 1996 does not appear to disclose or suggest to [the insured] the existence of a potential conflict of interest, generally, or even in the event that indemnity was not to be granted by the insurer’; see also Mills M, ‘Risks and Remedies for Conflict of Interests’ (1999) 10 ILJ 187.
  90. These reasons also led Barwick CJ to note that the award of interest should be at market rates.
  91. See ALRC 20 where at [328] it states that ‘[a]ssessment of damages for a breach of the duty of good faith by the insurer should be based on ordinary contractual principles’.
  92. Moss v Sun Alliance Aust Ltd (1990) 55 SASR 145.
  93. Notes to Draft Insurance Contracts Bill 1984, para 20 explains for Insurance Contracts Act 1984 (Cth), section 12: ‘good faith is in fact the paramount duty. It is not displaced or read down by any other duties which the Act imposes.’
  94. Such occasions are not considered however, as the focus of this article is contracts governed by the Insurance Contracts Act 1984 (Cth).
  95. The preferred view seems to be that Insurance Contracts Act 1984 (Cth), section 54 has no application to cases that fall within section 56(1): Gugliotti v Commercial Union Assurance Co of Aust (1992) 7 ANZ Insurance Cases 61-104; Thiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279.
  96. See Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68.
  97. Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1990] 2 All ER 947 at 959; see also Eggers and Foss, n 68, [16.35].
  98. There is no reason in principle why given the right facts an injunction could not be obtained. Lampson (Aust) Pty Ltd v Ahden Engineering (Aust) Pty Ltd [1999] 2 Qd R 252 is an example of a case where an insurer unsuccessfully sought an interlocutory injunction requiring the insured to disclose, pursuant to the duty of good faith, information material to whether there was double insurance in place: see also Re Worldcom Inc 2005 US Dist Lexis 1466, where a Worldcom director successfully obtained an injunction to require the insurer to advance defence costs until the insurer’s purported recision on the ground of material misrepresentation was finally determined.
  99. Whitfield v De Lauret and Co Ltd (1920) 29 CLR 71 at 77 per Knox CJ.
  100. In PMB Australia Ltd v MMI General Invitation Ltd [No 2] [2001] QSC 339, Mullins J stated: ‘Whether or not an insured can seek to claim exemplary damages against an insurer for damages for breach of contract in failing to pay the claim under the policy within a reasonable time has not been authoritatively determined: Moss v Sun Alliance Australia (1990) 55 SASR 145.’
  101. Moss v Sun Alliance Aust Ltd (1990) 55 SASR 145.
  102. See, eg ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374; 193 LSJS 406; Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) ANZ Insurance Cases 61-553 and endorsed on appeal (QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (2003) 13 ANZ Insurance Cases 61-586). As noted, this list is not exhaustive and damages can extend to emotional distress arising out of the wrongful repudiation by an insurer: Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZ Insurance Cases 61-420 and to consequential loss: Stuart v Guardian Royal Exchange Assurance of New Zealand Ltd [No 2] (1988) 5 ANZ Insurance Cases 60-844.
  103. Concluding with the observation: ‘the American insistence that although the duty exists as a contractual term in every contract, the tort arises from the breach of that duty only in the presence of a special relationship supports, in my view, the proposition that the tort may arise where the nature of the relationship brought about by the contract, as distinct from the terms of the contract, is such as to impose a duty to act in good faith. On that basis, the duty is a true tort duty, not a contractual duty and the existence of a contractual term is not a necessary foundation for it..
  104. Godfrey, ‘The duty of utmost good faith – the great unknown of modern insurance law’ (2002) 14 ILJ 1 at 12: ‘there appears to be no reason why, in an appropriate case, the same arguments [as in Gibson] should not be applied.’
  105. In the US, third-party bad faith has a history reaching back some 50 years: see generally Abraham KS, ‘The Natural History of the Insurer’s Liability for Bad Faith’ (1994) 72 Tex L Rev 1295. Judicial recognition of the tort of first-party bad faith is relatively recent; the first decision to recognise a tort action for first-party bad faith was Gruenberg v Aetna Ins Co 510 P 2d 1032 (Cal 1973). The California Supreme Court held that an implied covenant of good faith and fair dealing was created in the contract of insurance, which defined requiring neither party to do anything to injure the rights of the other party to receive the full benefit of the agreement. 
  106. Though it would not be the first time that it has taken some time for a new legal remedy or cause of action to be awoken and utilised to its full potential. Trade Practices Act 1974 (Cth), section 52 is a good example: see Miller R, ‘The Spreading Branches of s 52 of the Australian Trade Practices Act 1974’ (2005) 79 ALJ 43: ‘[over] the 29 years since the Trade Practices Act was introduced, s 52 has grown from a simple concept simply expressed to a broad-ranging section of general application in a wide range of commercial and contractual situations … While we have seen the section mature and grow it is doubtful that we have yet seen the full extent of its application as a central plank of Australian commercial, contract and consumer law’.
  107. Australia’s General Insurance Code of Practice does not have an equivalent to the 10 commandments used in the US. However, the existing and draft Codes do contain similar propositions. While the duty of utmost good faith in Australia is comprehensive. it is not broken down into specific components to the same extent as in the US.
  108. Drawn from ‘Ten Commandments of Good Faith’ which insurers in a number of US States are required to observe, eg Californian Fair Claims Settlement Practices Regulation. Brown M, ‘The Insurer’s Duty of Good Faith and Fair Dealing with his Insured under English Law’ (1998) 4 IJIL 250 at 251(cited in Godfrey, n 104).
  109. Draft General Insurance Code of Practice, para 1.4.
  110. General Insurance Code of Practice, para 5.1(c), (e); Draft General Insurance Code of Practice, para 1.4.
  111. General Insurance Code of Practice, para 5.1(d); Draft General Insurance Code of Practice, para 4.4(b).
  112. Draft General Insurance Code of Practice, para 4.8(b).
  113. General Insurance Code of Practice, para 1.3(c); Draft General Insurance Code of Practice, para 1.5(b).
  114. Draft General Insurance Code of Practice, para 4.8(a).
  115. Draft General Insurance Code of Practice, para 4.4(h).

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