The duty of utmost good faith owed by both insurers and insureds is experiencing something of a resurgence in the Australian insurance sector. Since the introduction of civil penalties in March 2019 for breaches of the duty by insurers, it has assumed a more central position in ASIC’s enforcement arsenal, like the efficiently, honestly and fairly requirement in Chapter 7 of the Corporations Act. ASIC has, in recent years, pursued several insurers on grounds of breach of their duty of utmost good faith.
In this article, we seek to distil five core principles that constitute the duty of utmost good faith, based on judicial treatment to date. Before doing so, we first briefly outline the evolution of the duty and its inherently flexible nature.
The duty of utmost good faith and its application to insurance dealings originated in the English common law over 250 years ago. In Australia, it was subsequently codified under section 13 of the Insurance Contracts Act 1984 (Cth) as an implied term in all insurance contracts.
Despite commercial lawyers’ preference for clear and precise rules, the scope and content of the utmost good faith duty owed by parties to insurance contracts is necessarily indeterminate. It is certainly true that the content of the duty is capable of evolving in line with changing regulatory standards and community expectations.
Since it was recognised, the duty of utmost good faith has been a central pillar in insurance law, designed to (so far as possible) better balance the inherent asymmetries that exist in insurance contracts. However, the rapid proliferation of other laws and codes governing insurance in Australia – including, for example, the introduction of claims handling as a financial service, the Life Insurance Code or Practice and General Insurance Code of Practice, and duty to take reasonable steps not to make a misrepresentation – have had an impact on the scope and content of the duty of utmost good faith.
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The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.