THE DUTY OF UTMOST GOOD FAITH · The Scope of the Duty of Utmost Good Faith It is imperativethat both the insurer and insured participate in all contractualnegotiations,4as the dutyof

THE DUTY OF UTMOSTGOOD FAITH

Kelly GodfreyEmployment Lawyers

Increasingly Courts are implying acommon law duty of good faith intocommercial contracts. Requiringparties to act honestly andreasonably in exercising theircontractual rights, absent ofcapricious or unconscionablebehaviour.1Whilst the nature of theduty of utmost good faith implied bys.13 of the Insurance Contracts Act7984 (Cth) ('the ICA') is different innature to that imposed by thecommon law, it too is receivingrenewed interest.2The doctrine ofutmost good faith in comparisonwith other provisions of the ICAremains somewhat of a mystery.Whilst it is an area of insurance lawwhich has remained relativelyunderutilised, the doctrine'spotential use makes it the greatunknown of modern insurance law.3

The Scope of the Duty ofUtmost Good FaithIt is imperative that both the insurerand insured participate in allcontractual negotiations,4 as theduty of utmost good faith is areciprocal duty which relates toevery aspect of the partiesrelationship.5 The duty endures untilall obligations underthe contract ofinsurance have been discharged.However, if the contract isterminated by a release, thesubsequent behaviour of the partiesmay be relevant.6lf a furtherlegitimate loss was discovered afterexecution of the release, the duty ofutmost good faith would prevent therelease being pleaded as a bar tothe claim. 7 ln Australia, if litigationis commenced in relation to thepolicy, the duty continues untiljudgement and perhaps beyond.8

Defining the Duty of UtmostGood FaithThe duty of utmost good faith,(alternatively known as the duty ofuberrima fides 9) is better describedthan defined. With the ICA providingno definition, guidance must bederived from an examination of theparties' relationship on a case bycase basis. 10 Wh ilst the duty

requires an 'essential element ofhonesty'll and 'good faith', arguablythe inclusion of the word 'utmost'elevates the duty to a higherstatus,12 requiring the parties to actfairly and reasonably in accordancewith community standards ofdecency and fair dealing. 13 It mayalso require candour,14 utmostfidelity, 15 the absence ofrecklessness16 and perhaps at itshighest, sacrificing a discretionaryeconomic advantage incircumstances where its misuse willbe detrimental to the other party.17It is not however, a fiduciary duty,requiring one party to place theneeds of the other above its own. 18

A party to an insurance contract willbe prevented from relying upon anyprovision in the contract where todo so would constitute a breach ofutmost good faith. 19

An objective test, applied to thesubjective facts of the particularcase, is used to ascertain whetherthe duty of utmost good faith hasbeen breached. That is, would areasonable person with thesubjective knowledge of the insurer(orthe insured as the case may be)take such action?20

Breach of the Duty ofUtmost Good Faith by theInsurerWhilst not an exhaustive list andobviously based on the particularfactual circumstances pertaining tothe case at hand, the duty of utmostgood faith has been found to havebeen breached where the insurerhas:

• failed to explain the importantprovisions of the policy to theinsured;21

• failed to notify the insured of theserious consequences of breachinga condition of the policy;22

• failed to inform the insured of anyconditions which are precedent tothe insurer's liability to pay theclaim;23

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 19

The duty requires the insurerin certain circumstances todiscLose materiaL which maybe adverse to their case as,weLL as provide the insuredwith the opportunity toaddress any matters uponwhich the insurer has reLiedin making theirdetermination.

• failed to observe the strict termsof the insurance contract;24

• relied on a term which had beenincluded in the policy in error;25

• failed to advise the insured thatthe policy they had obtained did notafford the protection they hadexplicitly req uested ;26

• failed to progress a claim and tomake a decision on liabilitywithin areasonable period of time;27

• failed to provide an adequateexplanation for denying the claimwithin a reasonable period oftime;28

• failed to make a settlementpayment on a legitimate claimwithin a reasonable time;29

• failed to investigate a claim priorto denying it;30

• failed to act reasonably and tocarefully assess the interests ofboth the insured and insurerwhenmaking the decision to defendrather than settle the claim ;31

• failed to consult with and to makeproper disclosu re to the insu redwhere there was a conflict ofinterest between the parties;32

• failed to be candid and failed tomake clearto the insured at anearly stage the limits of anyobligations arising under the policy.The insurer also failed to advise theinsured of differential liability, aswell as the risks the insured facedand forwhich they may requireindependent legal advice;33

• failed to act properly andreasonably in assessing claims.

This obligation becomes moreonerous in circumstances wherethe insurer is making adetermination in its own interests.The duty requires the insurer incertain circumstances to disclosematerial which may be adverse totheir case, as well as provide theinsured with the opportunitytoaddress any matters upon whichthe insurer has relied in makingtheir determination.34

• failed to consult with the insuredin settling the claim and to explainthe consequences of thesettlement.

Whilst there is a 'quality ofconfidence' between the partiesthere is no disparity in the parties'bargaining power35

• declined the claim withoutcredible and genuine reasons.

Mere suspicion is not sufficient toreject the claim. Nor is the insuredpermitted to unmeritoriouslytestthe claim by putting the insured to

proof.36

A breach of the duty may arisewhere the insurer:

• fails to notify the insured of anentitlement they have under apolicy of which the insured lacksknowledge;37

• engages in 'horse trading',something which is prevalent inclaims negotiations;38

• fails to draft the policy ofinsurance in clear andunambiguous language, so that theinsured clearly understands thepolicy;39

• fails to disclose to the insuredpertinent information which wouldhave a substantive effect upon theinsured's decision to insure againstthe risk;40

• without a valid reason, offers theinsured uncommercial conditionson the renewal of a policyattempting to dissuade the holderto discontinue coverage;41

• delays payment of a claim tosecure an investment benefit;42

• makes an unreasonable andunnecessary request forinformation.43

The Courts have held that the dutyhas not been breached, in thefactual circumstances of theparticular case, where the insurer:

• accepted an increased premiumwith the knowledge that anexclusion clause in the policywas

20 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

likely to apply, in circumstanceswhere it had explained theexclusion and given the insured thechance to overcome it;44

• unreasonably refused to follow acertain course of action;45

• maintained a bona fide defencewhich ultimately failed ;46

• cancelled the insurance policy onthe basis of fraud after it had paidthe claim.47

A breach will not necessarily befound where the insurer refuses toaccept an attractive settlementoffer in an attempt to avoid adversepublicity or to attempt to have theinsured share the liability.48

To a large extent these decisionsreplicate the 'Ten Commandmentsof Good Faith' which insurers in anumber of States in the UnitedStates of America are required toobserve. Many States in the UnitedStates have enshrined these dutiesin statute.49 These Commandmentsrequire insurers to:

1. judiciously investigate claims;

2. efficiently evaluate claims;

3. inform the insured of allsettlement negotiations;

4. notify the insured of the likelyoutcome of litigation;

5. forewarn the insured of thepossibility of a decision exceedingthe policy and counsel the insuredin relation to any action they couldtake to avoid that occurrence;

6. conduct themselves havingregard to the interests of theinsured;

7. reasonably consider anyequitable offer of settlement and toaccept that offerwhere it would bereasonably prudent to do so, giventhe possibility of paying the totalindemnity;

8. furnish a legitimate defence andto appeal any adverse decisionwhere good faith requires suchaction be taken;

9. exercise care when providing alegal defence;

10. use due skill and care whenadjusting claims. 50

The duty of utmost good faith mayrestrain an insurer's ability to relyon information obtained by itsagents, where those agents:

• prior to an indemnity beingobtained, gather informationwithout first warning the insuredthat they are conductinginvestigations without prejudice tothe insurer's rights; or

• without informing the insured thatsuch information may be reliedupon by the insurer in assessing theclaim. 51

Breach of the Duty ofUtmost Good Faith by theInsuredAgain, whilst not a definitive guideand obviously based on theparticular factual circumstancespertaining to the case at hand, theduty of utmost good faith has beenheld to have been breached wherethe insured:

• deliberately provided a falseanswer in a claims form;52

• in the case of a legal indemnitypolicy, failed to advise the insurerthat proceedings had been initiatedagainst it and hence failed toprovide the insurerwith theopportunity to assume conduct ofthe matter;53

• intentionally withheld informationin making a claim, intending todeceive the insurer;54

• failed to act reasonably so as toreduce or minimise the insurer'sliability;55

• failed to provide informationrequired by the insured andrequired by the terms of thepolicy;56

• knowingly made a fraudulentclaim.57


Other circumstances in which abreach of the duty may be foundinclude:

• failure to notify the insurer ofcircumstances which may effect theinsurer's future conduct withrespect to the policy,58 incircumstances where there is anenduring contractual obligation todo SO;59

• recklessly completing a claimsform ;60

• an exaggeration of thecircumstances pertaining to aclaim;61

• engaging in 'horse trading' tosettle a cla im ;62

• failure to provide information toenable the insurer to make adecision on indemnity.63

It is unlikely that a breach of theduty will be found where theinsured:

• fails to disclose their precariousfin ancia l posit ion;64

• provides information which doesnot fully disclose all necessaryissues, in circumstances where theinsurer neglects to requestadditional material. 65

Courts have held that the duty hasnot been breached on the specificfactual circumstances of the case,where the insured:

• in accordance with legal advice,withheld information in an effort tosecu re assista nce from thereinsured's underwriting agent;66

• failed to disclose that they haddouble insurance;67

• failed to declare property coveredby the policy in a declaration ofvalue clause;68

• made a bona fide claim andinstituted court proceedings whenthe claim was denied by theinsurer;69

• elected in accordance with legaladvice, not to notify the insurer ofcircumstances which may give rise


to a claim, due to the likely effecton future premiums;70

• failed to notify the insurer ofinformation which was discoveredonly after the claim had beensettled and the contract terminated,in circumstances where there wasno continuing obligation to do SO;71

• had increased the potentialliability of the insurer, by acting inaccordance with legal advice andelecting to rescind an earliersettlement agreement and enterinto a new one which provided forthe assignment of the insurancecontract for an additional year;72

• made an innocent error incompleting a claim form;73

• used the formula provided in thepolicy to calculate the amountpayable, in circumstances wherethe method produced an inaneresu It.74

Insurance brokers do notthemselves owe the insurer a dutyof utmost good faith. However, asthe insured's agent, they must beextremely careful not to breach theinsu red's duty by thei r actions. 75

REMEDIES FOR BREACH OFTHE DUTY OF UTMOSTGOOD FAITHBad Faith Claims andPunitive DamagesBad faith claims are prevalent inthe United States. It is based on thepremise that insurance is obtainedfor peace of mind, which has seen aflurry of litigation and an expansionof the concept beyond Australianstandards. 76 This covenant of goodfaith and fair dealing obliges theparties to avoid any action whichmay harm the rights of the other tosecure the benefits of thecontractual bargain. 77 ln the UnitedStates, a breach of the duty maygive rise to both contractual andtortious liability, resulting in notonly compensatory and punitivedamages but also damages for hurtfeelings and emotional distress.78

Whilst some US courts haveindicated that there should be areasonable relationship betweenthe award of punitive andcompensatory damages, there areno prescribed limits. In determiningthe quantum of the award some UScou rts have gone to the extreme ofallowing evidence of the insurer'sfinancial position to be tendered.The State of California hasconsistently made the highestawards, with punitive damagessometimes 200 times thecompensatory damages award.Some US courts have alsoindicated a willingness to awardpunitive damages in cases wherecompensatory awards are denied.79

The evolution of bad faith damagesin New Zealand has been shortlived with the New Zealand Court ofAppeal overturning the High Court'sdecision to award bad faithdamages in Cedenco Foods LtdvState Insurance Ltd.8o The HighCourt in making the award indicatedthat whilst the payment of interestwent some way toward providingappropriate compensation, the'outrageous' failure of the insurer topromptly pay the valid claimjustified sanction byway of punitivedamages, intended to punish theinsurer.81

Whilst the Australian Law ReformCommission ('theALRC') hasdeclined to introduce a tort of badfaith into the ICA, asserting thatcontractual remedies aresufficient,82 the courts have at least,in circumstances where theinsurance contract is not subject tothe ICA, indicated the potential forthe existence of a tortious duty.83Whilst awards of punitive orexemplary damages are rare, oftenconfined to intentional torts such asdefamation and trespass,84 it

appears that Australian courts arebecoming less conservative in theirapproach.85

Theoretically damages exceedingthe limits of the insurance policyare possible. If an insurer

unreasonably declines to settle amatterwithin the limits of thepolicy, resulting in a determinationexceeding policy limits, ordinarycontractual principles shouldpermit a compensable award ofdamages, which may exceed policylimits.86 It is possible that punitivedamages may also be imposedwhere an insurer demonstrates acallous disregard forthe interestsof the insured or systemicallybreaches the policy. Whilst s.13 islikely to play an ancillary role insuch circumstances, (the actionlikely to involve a breach of otherterms and conditions of the policy),the very existence of the duty ofutmost good faith may increase thelikelihood of such an award.8?

In Gibson v The Parkes DistrictHospita{88 Badgery-Parker Jexamined the duty of good faith inthe context of a workerscompensation policy, not subject tothe ICA. However, His Honour'sreasoning could equally be appliedin the context of claims arisingunder the ICA. His Honour held thatthe insurer had breached its duty ofgood faith in failing to process andpay the claim within a reasonableperiod of time and that this breachattracted liability for damages intort, given the proximaterelationship between the parties,characterised by 'dependence andvulnerability' .89 His Honourindicated that the damage sufferedby the insured went well beyondthat which the workerscompensation scheme couldremedy. He indicated that theinsurer's conduct had the potentialto cause not only 'temporaryhardship, anxiety and distress, butalso in some cases ongoingeconomic loss; as where during theperiod of delay the worker is unableto maintain mortgage or hirepurchase payments and suffersforfeiture or is forced to sellassets' .90 For this the worker must

receive adequate compensation.


Whilst both Cooper J in Dorrough vBank of Melbourne Ltd 91 andMcDonald J in Gimson v VictorianWorkcoverAuthority 92 haveexpressed their doubts in relation toBadgery-Parker J's decision inGibson, there appears no reasonwhy in an appropriate case, thesame arguments will not beapplied.

For instance, in Stuart vGuardianRoyal Exchange Assurance ofNewZealand Ltd [No 2}93 the New

Zealand High Court awardedadditional damages in the form of:

• interest on mortgagerepayments, which but for theinsurer's failure to indemnify wouldhave been discharged;

• expenses associated with apropertywhich the insured wasunable to use; and

• alternative accommodationcosts.94

However, the court rejected a claimfor maintenance and securityexpenses since these were coststhe insured would have beenrequired to incur regardless of theinsurer's breach. 95

Whilst damages for hurt feelings,disappointment, frustration andanxiety are not, as a general rule,awarded in a breach of contractcase, the New Zealand High Courthas deemed appropriate, as part ofthe general damages component tomake an award for distress andinconvenience, in circumstanceswhere it can be shown that suchwas a reasonably foreseeableconsequence of the insurer'sbreach.96 If the comments ofBadgery-Parker J in Gibson andBollen J in Moss are any indication,this may be the direction in whichthe Australian courts are heading.

The courts in Kassem v ColonialMutual 97 and CIC Insurance Ltd vBankstown Football Club 98 discussthe ability of the insured to recoverbeyond the terms of the contract.This is dependent on whetherthe


insured treats the insurer's breachof a term of the contract (or breachof s.13) as a repudiation andterminates the contract or elects tokeep the contract on foot. In thelater case, the insured's recoverywould be limited to the contractualindemnity specified in the policy,however, in the formerthe insuredcould arguably recover beyond thelimits of the policy.

In this respect the abilityto claimdamages in an insurance contextmay differ with respect to theposition which exists at commonlaw. The common law permits aparty, in circumstances of a breach,to either keep the contract on footand sue for damages in relation tothe breach of that provision oraccept the repudiation, terminatethe contract and sue for damages.99

However, the English and NewZealand cases of Grant vCooperative Insurance Society 100and Stuart,101 adverted to by Hirst J

in Ventouris v Mountain {'The ItaliaExpress'} No.2, 102 suggest that

there might also be an entitlementto damages over and above thepolicy limits, in circumstanceswhere there was not a repudiation,on the basis that it wascontemplated by the parties thatthe obligations under the contractwould be carried out a certain wayand theywere not. Clearly thematter remains open forspeculation and future clarificationis awaited with interest.

In 'The Italia Express'103 Justice

Hirst indicated that damages forhardship, inconvenience andmental distress may be recoveredin circumstances where thepurpose of the contract of insurancewas to provide 'peace of mind orfreedom from distress'.Acknowledging that a marineinsurance contract was unlikely tobe of this ilk given the insured wasnormally a company, he left openthe possibility that an individualmay be able to invoke the 'peace ofmind' test, thereby securing such

damages. 104

The English Court of Appeal inSprung vRoyal Insurance Company(UK) Ltd,105 indicated that in an

appropriate case they may bepersuaded to award damagesexceeding the contractualindemnity obligation. This maynecessitate the English Courtscategorising the duty to indemnifyfor loss as one which is implied inthe insurance contract, inpreference to the duty of utmostgood faith, thereby limiting theinsured's remedy to rescission ofthe policy.106

In Johnson vAustralian Casualty CoLtd,107 a case involving an incomeprotection disability policy, theSupreme Court of Victoria held,given the nature and purpose of thepolicy, that it was a foreseeableconsequence of the insurer's delaythat the insured would suffermental distress, physicalinconvenience and exacerbation oftheir illness. The Court thereforeawarded $20,000 in damages, aswell as an order for specificperformance. 108 Similarly, the NewSouth Wales Court of Appeal inMAM Insurance Pty Ltd vKelly 109

awarded damages for emotionaldistress in respect to non-paymentpursuant to a motorvehicle policyof insurance. The Court indicatedthat the award could be madewithout supporting medicalevidence. 110

Peterson argues that thedevelopment of a general tortiousduty, recognising the inherentrequirements of utmost good faithand applied with sufficient flexibility,could provide a unifying standard ofgood faith with appropriateremedial elasticity.lll

Interest and HungerfordsDamagesA breach of the duty of utmost goodfaith has the potential to make awide range of remedies available,including the payment of interest.Section 57 of the ICA requires aninsurerto pay interest from the dateon which it is deemed that payment

of the claim was unreasonablywithheld, to the date the payment ismade or posted, whichever isearliest. 112 The interest rate iscontained in Regulation 32 of theInsurance Contracts Regulations. Itis calculated on the basis of theprevailing interest on TreasuryBonds plus three per cent. The rateof interest can be adjusted inaccordance with market rateswhere the rate specified inRegulation 32 is deemedinappropriate. 113

Traditionally, courts in relation to abreach of the duty of utmost goodfaith or for that matter any otherfundamental term of the insurancecontract, have been extremelyreluctant to sanction any awardwhich would exceed theindemnified amount plus interestpursuant to s.57. However, aquestion has now arisen as towhether s.57 permits recovery ofHungerfordsdamages l14 in additionto the payment of interest, therebypotentially further expanding therange of remedies available wheres.13 is breached.

In Moss vSun Alliance Australia Ltd115 Bollen J indicated that s.57 of the

ICA should not be regarded as acode for the recovery of paymentswhich have been withheld under apolicy of insurance. His Honourindicated that s.57 did not state thatonly interest and no damages wererecoverable. 116 Bollen J in awardingthe insured an additional amount tocompensate forthe extra interestwhich had accrued as a result of theinsurer's delay indicated that thiswas a 'compensable consequence'which the insurer should havereasonably foreseen would arise asa result of their actions. Whilstrefusing the insured's claim of anadditional $500,000.00 forexemplary damages in thecircumstances which arose in thiscase, his Honour indicated that suchan award may be possible incircumstances of reprehensibleconduct.117


Whilst there appears noreason why, in anappropriate case, that acourt will not grantdeclaratory or injunctiverelief, this is still a relativelyuntested domain. Incircumstances where aninsurer is unreasonablydelaying determination of theclaim, it may be possible foran insured to request anorder requiring a decision bemade.

Whilst Bollen J's decision in Moss,that s.57 does not preventHungerfordsdamages consisting ofcompound interest, has received agreat deal of support,118 the matter

is far from settled. Opponents findsolace in:

• comments by Mason CJ andWilson J in Hungerfordscase thats.30C of the Supreme Court Act7935(SA) was 'not intended to erecta comprehensive and exclusivecode governing the award ofinterest' ;

• the obiter contentions of McHughJA in NRMA Insurance Ltd v Tatt 119

that s.57 'completely, exhaustivelyand conclusively [states] the law onthe subject of interest payable forperiods during which a person hasbeen kept out of insurance moneysto which he is entitled'; and

• the addition of sections 57(4) and(5) by the Insurance LawsAmendmentAct 7998;

to argue for its preclusion and tosupport the codification of s.57. 120

However, the Full Federal Courtdecision of Elders Ltd vSwinbank121 suggests that the matter entirely

depends on the basis upon whichdamages are claimed. IfHungerfords damages are claimed'on a basis different from theopportunity or borrowing costsmeasured by appropriatecommercial rates there is noreason to read s.57(5) as limiting aclaimant to recovery of interestunder s.57[l) as the onlycompensation for those losses'. Thecourt indicated that Mason CJ andWilson J's reference in Hungerfordscase to the 'rule of law' referred to

principles of common law andhence:

Section 57(5) should be confined topreventing the award, by way ofcompensation for being kept out ofmoneys payable under a contract ofinsurance, of interest under anyState legislation or interest asdamages under any rule of thecommon laworequity.122

Whilst it appears the utilisation ofs.57 and payment of Hungerforddamages currently remains aremedial option available in breachof s.13 cases further clarification ofthe position is required.

Declaratory or InjunctiveReliefWhilst there appears no reasonwhy, in an appropriate case, that acourt will not grant declaratory orinjunctive relief, this is still arelatively untested domain. Incircumstances where an insurer isunreasonably delayingdetermination of the claim, it maybe possible for an insured torequest an order requiring adecision be made. Admittedly, inthese circumstances s.41 of the leAmay provide the insured with amore effective remedy. However,the possibility for the utilisation ofs.13 should not be overlooked orunderestimated in light of recentjudicialopinion. 123

In GIG Insurance Ltd v LeightonContractors Pty Ltd 124 andLampson vAhden 125 insurers failed

in their attempts to use s.13 tocompel the insureds to disclosecertain information. However, thosefailures can be confined to the factsat hand. There appears no logicalreason why in an appropriate casean insurer or an insured could notutilise s.13 to force disclosurewhere such constitutes a breach ofthe duty. 126

THE DUTY OF UTMOSTGOOD FAITH AND OTHERleA PROVISIONSDuty of Utmost Good Faithand the Duty Of Disclosure(ss.13and21lWhilst it appears that the duty ofdisclosure imposed by s.21 of theICAwas intended to create anexception to the paramount duty ofutmost good faith,127 obitercomments by Ormiston JA in CICInsurance Ltd v Barwon RegionWaterAuthority 128 has left open the

possibility that in certain


circumstances the duties mayco-exist, providing an alternativeremedy.129 Logically this

contingency should only be possiblein a claims context and not inrelation to the making of or renewalof a contract of insurance. Thiswould impose a greater burden onthe insured, than a mere nondisclosure claim unders.21, byenabling the insurer to deny liabilityratherthan simply charge anadditional premium.

It is extremely doubtful that thiswas the intention of the legislatureand certainly the proposition doesnot appear to compliment theapparent purpose of s.12. 130

Nevertheless, Barwon leaves open,by obiter dicta, the possibility, in asuitable case, forthe utilisation ofthe duty of utmost good faith in asituation which involves the duty ofdisclosure.

Duty of Utmost Good Faithand Third Parties(ss.13 and 48)Section 48 of the ICA enables athird party, who is not a party to theinsurance contract, but who is eitheridentified or referred to as a partyto whom the coverage extends, torecover under the policy directlyfrom the insurer. 131

Whilst both privity of contract andthe wording of s.13 would suggestthat the duty of utmost good faithwas limited to the parties to theinsurance contract, obitercomments by Hunter J in Wyllie vThe National Life ofAustralasia Ltd132 and others, 133 leave open the

possibility in certain circumstances,of an extension of the duty toinclude third parties. 134

Unfortunately, the present case lawfails to clarifywhetherthe commonlaw duty or the statutory duty underthe ICA applies. Whilst there aresignificant differences between theapplicable duties, the extent towhich the common law duty hasbeen influenced by the operation ofthe ICA also remains an issue forjudicial determination. 135

Duty of Utmost Good Faithand the Insurers Inability torefuse to Pay Claims inCertain Circumstances(ss.13 and 54)Whilst it appears that Parliamentintended that the remedies outlinedin s.54 of the ICAwould be availablein the case of a breach of the duty ofutmost good faith, its application isproblematic. 136 According to Sutton,in circumstances where a breach ofs.13 is not enough to enable theinsurer to deny either the whole orpart of the claim, then the insuredmay not be able to utilise s.54. 137 Ofcourse, unless the insurer canotherwise legally decline toindemnify the insured, they mustpay the entire claim and thereaftercounter-sue the insured for breachof s.13. 138

According to Ipps J in Entwells vNational & General 139 andothers,140 s.54 will not permit an

insurer where there is a breach ofs.13 to avoid the contract ab initio.Section 54(1) will only permit theinsurerto refuse the claim to theextent that the interests of theinsurer have been prejudiced by thebreach. 141 However, some wouldargue that any counter action forbreach of s.13 should bedetermined pursuant to theordinary contractual rules ofremoteness and foreseeability, notprejudice. 142 Furthermore, the issueof prejudice may not be as easilyresolved in some cases as it was inEntwells. 143

According to Tarr, the right to annulthe insurance policy for breach ofthe duty of utmost good faith is ableto be reconciled with s.54(1) on thebasis that the annulment worksprospectively, whereas s.54(1) onlyattempts to maintain the claimwhere there is no prejudice. 144

However, Yeldham argues that s.13operates as an independentremedy and may be used toovercome a situation where aparties rights would otherwise belimited by ss.54 and 56. Therefore,


THE FUTURE FOR THEGREAT UNKNOWN OFMODERN INSURANCE LAWGiven the aura of consumerprotectionism which pervades theICA and the legal environment ingeneral, the principles embodied ins.13 are ever increasingly capableof broader application. Justicedemands that the law continues toevolve and develop and novelty ofargument will not of itself impede aclaim. Whilst some of thepossibilities have been discussedabove, many await future judicialconsideration, analysis anddetermination.157

where s.56 could be applied, s.54 isredundant, given s.54 is subject tothe provisions of s.56 concerningfraudulent claims. 152

Whilst the relationship betweenss.13 and 56 awaits authoritativedetermination in the Australiancontext, the recent House of Lordsdecision of Manifest Shipping CoLtd vUni-Polaris Shipping Co Ltd 153

has seen a watering down of thepost contractual duty of utmostgood faith in England. As a result ofthis decision, the insurerwill find itextremely difficult, in the absenceof fraud in the claims process, tosuccessfully argue that theinsured's conduct constitutes abreach of the duty of utmost goodfaith. 154 The Court indicated thatwhilst it was appropriate to requirean extremely high level ofdisclosure at the formation stage,there was no reason to expect thesame level of disclosure to extendbeyond this stage. 155 This decisiontypifies the increasing trend inEngland to not only severelyrestrict the opportunities for aninsurerto avoid the policy but tolimit the duty of enduring goodfaith. 156

a great deal of uncertaintysurrounds the relationship betweenss.13 and 54, (and as we shall seess.13 and 56), which requiresfurther judicial consideration andana lysis. 145

Duty of Utmost Good Faithand Fraudulent Claims(55.13 and 56)It is difficult to reconcile the duty ofutmost good faith with the freedomgiven to the courts under s.56 of theICA to provide equitable relief for'little frauds'. Whilst s.56 permitsthe insurer to refuse to pay a claimwhich is made fraudulently, it doesnot enable the insurer to avoid thecontract. The complication arisesbecause the duty of utmost goodfaith is said to be paramount andnot constrained by any other law orprovision in the ICA,146 yet clearly,

fraud in any context or quantity willconstitute a breach of s.13. Log icwould therefore dictate that theduty of utmost good faith may beused as an alternative argument incircumstances of fraud.Alternatively, where the conduct didnot satisfy the requirements of s.56it might nevertheless constitute abreach of ss.13 or 14. Of course,whether a claim is fraudulent or notis an entirely subjective matter 147

The only explanation Tarr canprovide to reconcile the duty ofutmost good faith with s.56 is thatthe legislature, by allowing thecourts to excuse 'little frauds', areproviding an appropriate degree offlexibility to avoid the imposition ofdisproportionate penalties, ratherthan intending to detract from theduty of utmost good faith itself.148

However, the distinction clearly hasno basis in logic and is adept todescribing a lady as only being a'little pregnant'. It has the sameperverse and irrational flaws. 149

In\ Tiep Thi To vAustralianA~\sociatedMotor Insurers Ltd 150

the, court left open the question ofthe\.relationship between the duty ofutmost good faith and s.56,151

however, clearly indicated that

28 AUSTRALIAN CONSTRUCTIO~ LAW NEWSLETTER #87 DECEMBER 2002

The only explanation Tarr canprovide to reconcile the duty ofutmost good faith with s.56 isthat the legislature, byallowing the courts to excuse~little frauds', are providing anappropriate degree of flexibilityto avoid the imposition ofdisproportionate penalties,ratherthan intending todetract from the duty of utmostgood faith itself. However, thedistinction clearly has no basisin logic and is adept todescribing a lady as only beinga ~little pregnant' .It has thesame perverse and irrationalflaws.

REFERENCES1. Mansfield LJ in Carter vBoehm(1776) 3 Burr 1905; 97 ER 1162;[1558] All ER Rep 183 is creditedwith having first introduced the dutyinto the English common law. Formore recent examples where theduty has been implied see RenardConstructions (ME) Pty Ltd vMinister for Public Works (1992) 26NSWLR 234; Hughes Bros Pty Ltd vTrustees of the Roman CatholicChurch for the Archdiocese ofSydney and anor(1993) 31 NSWLR91; Hughes Aircraft SystemsInternational vAirservices Australia(1997) 146 ALR 1 per Finn J at 3647; Burger King Corporation vHungryJack's PtyLtd[2001]NSWCA 187; LMI v Baulderstone[2001] NSWSC 886. See generally:Mason A, 'Contract and itsRelationship with EquitableStandards and the Doctrine of GoodFaith', The Cambridge Lectures(Paper presented at The CambridgeLectures, Cambridge, 8 July 1993);Peden E, 'I ncorporati ng Terms ofGood Faith in Contract Law inAustralia' (2001) 23 Sydney LawReview 222;PricewaterhouseCoopers Legal,'The Obligation to Act "in GoodFaith'" (October 2001) Construct 1;Gray A, 'The Duty of Utmost GoodFaith' (Paper presented at the IRRConference 2001, 1 May 2001) 1 at2-3.

2. Whilstss.13and 14arguablycodify the duty of utmost good faithforthe purposes of the ICA, thecommon law duty continues toapply to those areas of insurancelaw referred to in s.9 of the ICA.However, given the preservation ofthe common law by s. 7 of the ICAthere are still limited opportunitiesforthe operation of the commonlaw duty in relation to ICA contracts.Mann P, Annotated InsuranceContracts Act (Sydney: Law BookCo., 3rd ed, 2001) [12.10.2]; MaselG, 'The Post-contractual Duty ofUtmost Good Faith'(1998) 13(8)Australian Insurance Law Bulletin101; Gray, Note 1 at 1,5,6.

3. Yeldham BA, 'Good Faith andClaims Handling' (Paper presentedat the BLEC Seminar: InsuranceLitigation and Complex ClaimsManagement, Syd ney, May 1991)49,76; Bremen J, 'Good Faith andInsurance Contracts-Obligationson Insurers' (1999) 19 AustralianBar Review89, 90-91,93; Gill Mand Radford M, 'Utmost Good Faith:Section 13 and Breach of Contract'(1994) 10(2) Australian InsuranceLaw Bulletin 17, 19.

4. Cameron MacIntosh Pty Ltd v CE Heath Underwriting & Insurance(Aus t} Pty Ltd(unreported) Vic SupCt, Ormiston J, 25 September 1991.Mann, Note 2 at [13.30.1]; Masel G,Tulloch T and Sharpe A, The PhillipsFoxAnnotatedAustralian InsuranceLawStatutes (Syd ney: ProspectMedia Pty Ltd, 2001) [13.40].

5. Whilst the duty applies to bothpre and post contract formation, theambit of the duty pertaining to eachmay be different. See: the House ofLords decision of Manifest Shipping& Co Ltd v Uni-Polaris InsuranceCo Ltd ['The Star Sea'} [2001] 2WLR 170 for a further discussion onthis in the context of the EnglishMarine Insurance Act; Black KingShipping Corp & Wayang (Panama)SA v Massie (The 'Litsion Pride '}1985 1 Lloyds 437 per Hirst J at511-512; Australian Law ReformCommission, Insurance Contracts,Report No 20 ('ALRC 20')(Canberra: Australian GovernmentPublishing Service, 1982) at [328];Mann, Note 2 at [13.10.4]; Masel,Note 2 at 101, Gray, Note 1 at 1;Moran PJ, 'Duty of Utmost GoodFaith-Where is it Heading?' (Paperpresented at the AustralianInsurance Law Conference: Updateon General Insurance Issues(Session 5), Perth, 2-4 September1998) 1,2,3; Bremen, Note 3 at 90;Eggers PM and Foss P, Good Faithand Insurance Contracts (London:LLP, 1998) 13.03.

6. Trans Pacific Insurance Co(Australia) Ltd v Grand UnionInsurance Co Ltd(' Trans Pacific'),

NSW Sup Ct per Giles J; CICInsurance Ltd v Tancredi (' Tancredi') (1996) 9 ANZ Ins Cas 61-302 perNathan J. Mann, Note 2 at[13.10.5]; Moran, Note 5 at 11 ;Gray, Note 1at 14.

7. Gill M and Radford M, 'UtmostGood Faith-The Coming ofAge'(1994) 10(1) AustralianInsurance Law Bulletin 1,3.

8. Horbelt vSGIC (unreported) SupCt of SA, 26 June 1992. Cf. TheEnglish decision of 'The StarSea'Note 5which held that oncelitigation commences the duty ofutmost good fa ith ceases to operatebecause the parties are nowopponents and the Rules of Courtrequiring disclosure dispense withthe need for the duty of utmostgood faith. It is likely that this wouldalso include arbitrations. Loo R,'The Duty of Utmost Good Faith: Isthe Duty Expanding?' (May 2001)Allens Arthur Robinson: Insurance1,2; Smith P, 'Duty of Utmost GoodFaith Clarified' (2001) 9 FortuneManning: Insurance Brief1;Dingwall S, Hargreaves EandMcGough L, 'Post-contractual Dutyof Utmost Good Faith' (2001) NortonRose: Briefing-Insurance Group 1,3; Pring M, 'The Continuing Duty ofUtmost Good Faith: Clear (Legal)Water, at Last?' (1 March 2001)Denton Wilde Sapte InsuranceGroup 1,4,6; Eggers et al., Note 5at 12.47.

9. The literal definition of which is'of the fu llest confidence'. SeeSeaton vHeath, Seaton vBurnand(1899) 1 OB 782 per Romer LJ at792. CCH, Australian and NewZealand Insurance Law Reporter(Sydney: CCH Australia Limited,2002) [5-630]; Gray, Note 1 at 2.

10. Sheldon vSun Alliance Aust Ltd( 'Sheldon') (1989) 53 SASR 97 perBollen J at 152: 'The concept of"good faith" ... is resistant to precisedefinition.' Mann, Note 2 at[13. 10.3] ;Ti lbury M, 'I nsura nce' inVermeesch R B and Lindgren KE(ed), Business Law ofAustralia(Sydney: Butterworths, 10th ed,


2001) Chapter 28 at [28.27]; Gray,Note 1at 9,10; Bremen, Note 3 at90; Gill M and Radford M, 'UtmostGood Faith-The Coming of Age'(1994) 9(10) Australian InsuranceLaw Bulletin 81.

11. Vermeulen vSIMU InsuranceAssociation (1987) ('Vermeulen ') 4ANZ Ins Cas 60-812 per HardiesBoys J at 75,987; Kelly v NewZealand Insurance Co Ltd( 'Kelly')(1993) 7ANZ Ins Cas 61-197 at78,258; affirmed (1996) 9 ANZ InsCas 61-317 per Owen J at 76,51976,520; CIC Insurance Ltd vBarwonRegion WaterAuthority(' Barwon')(1999) 10 ANZ Ins Cas 61-425.However, dishonesty is notnecessarily required to constitute abreach. ACN 007838374 Pty Ltd vZurich Australia Insurance Ltd('ACN 007 ') (1997) 69 SASR 374per Olsson J. Cf. Barwon, obitercomments by Ormiston JAwhothought an element of dishonestymay be necessary. Mann, Note 2at[13.10.3]; Masel, Note 2 at 102103; Gray, Note 1at 9; CCH, Note 9at [5-640]; Masel et al., Note 4 at[13.20J.

12. Sheldon, Note 10 per Bollen Jat 152; Gutteridge vCommonwealthofAustralia (' Gutteridge')(unreported) Qld Sup Ct, 25 June1993 per Ambrose J at 11 ; re ZurichAustralian Insurance Ltd (' reZurich') (1999) 10 ANZ Ins Cas 61429 per Chesterman J at 74, 839;Hoffmann F, 'Knowing the Rightsand Obligations Under the Duty ofUtmost Good Faith' (Paperpresented at the II RConferences,The 7995 National Insurance Lawand Litigation Congress, Sydney, 29March 1995); Mann, Note 2 at[13.10.3]; Masel, Note 2 at 102103; Tilbury, Note 10 at [28.27];Moran, Note 5 at 4,5,20; Gray,Note 1at 4,9. Cf. Henchliffe S,'Insurance Claims: Fraud and theDuty of Utmost Good Faith' (1997)8(3) Insurance LawJournal 21 0;Hawke F, 'Utmost Good Faith-WhatDoes it Really Mean?' (1994) 6Insurance LawJournal 91 ,98;


Scotford T, 'The Insurer's Duty ofUtmost Good Faith: Implications forAustralian Insurers' (1988) 1(2)Insurance LawJournal 1,2-4.

13. Essentially 'a form ofcommercial morality'. Hawke, Note12 at 142. These obligations arealso quintessential to the GeneralInsurance Code of Practice. SuttonK, Insurance Lawin Australia(Sydney: Law Book Co Ltd, 2nd ed,1991) 101; Lucke HK, 'Good Faithand Contractual Performance' inPO Finn (ed), Essays on Contract(Sydney: Law Book Company,1987) 155, 160; Kelly, Note 11 perOwen J at 111 ; Barwon, Note 11perOrmistonJAat699. Mann, Note2 at [13.10.3], Masel, Note 2 at102-103; Tilbury, Note 10 at[28.27]; Gray, Note 1at 10; Moran,Note 5 at 4.

14. Nigel Watts Fashion AgenciesPtyLtdvGIG General Ltd( 'Nigel')(1995) 8 ANZ Ins Cas 61-235 perKirby Pat 75,643. Masel, Note 2at103.

15. GIG Insurance Ltd vLeightonContractors Pty Ltd( 'Leighton')(1996) 9 ANZ Ins Cas 61-293.Masel, Note 2 at 103.

16. Barrett vState ofSouthAustralia (1994) 62 SASR 208; ACN007, Note 11. However, an innocenterrorwill not be sufficient to resultin a breach of the duty of utmostgood faith. See Kinred vStateInsurance General Manager('Kinred') (1989) 5ANZ Ins Cas 60923. Masel, Note 2 at 102, 103.

17. Hawke, Note 12 at 96 citingProfessor Burton's reliance on theconcept of 'expectation interest'.Masel, Note 2 at 103.

18. Loa, Note 8 at 8.

19. s.14 ICA. Masel, Note 2at 102;Gray, Note 1at 7; Bremen, Note 3at 90; LBC, Halsbury's Laws ofAustralia, Vol22 (at 11 March 2002)22 Insurance and Income Security,'Chapter 6 Part B Division 2Subdivision (i) Utmost Good Faith'[67J.

20. Loa, Note 8 at 4. See also theHouse of Lords comments in 'TheStarSea'Note 5 on this issue.Whilst the case concerned anexamination of the duty of utmostgood faith in terms of the MarineInsurance Act 7906 [UK) theirLordships comments provideassistance in an examination of theduty in the context of the ICA.Dingwall et al., Note 8 at 3.

21. AAMI Ltd vEllis [' Ellis') (1990) 6ANZ Ins Cas 60-957 per Cox J.Masel et al., Note 4 at [13.50]; Loa,Note 8 at 5; Eggers et al., Note 5 at12.15, 12.32, 12.33.

22. Ellis, Note 21 per Cox J. Cf.Chesterman J in re Zurich, Note 12at 74,840 who indicated that such afinding 'elevated [the] obligation inan insurerto coddle its insured and[allowed] idiosyncratic judicialsolicitude to replace principle'.Masel, Note 2 at 103; Gray, Note 1at 1,8; Moran, Note 5 at 10; Tilbury,Note 10 at [28.28]; Mann, Note 2 at[13.40.3], [14.1 0.2J.

23. Re Bradley and Essex andSuffolk Accident IndemnitySociety(1912) 1 KB 415. Moran, Note 5 at8.

24. Banks vNRMA Insurance Ltd['Banks') [unreported) Sup Ct ofNSW, No. 28340/87, Brownie J, 1September 1998-the duty ofutmost good faith required theinsurer to pay for the replacementcosts of a building, despite its ageand the fact that it contained manyfeatures which were unlikely to bereinstated. The message forinsurers is clear, revise standardform contracts if you do not wish tobe compelled to complywith theterms. Ibrahim vGreater Pacific LifeInsurance Co Ltd(1996) 9 ANZ InsCas 61-330 per Brownie J held thatit would be a breach of the duty ofutmost good faith for an insurer todeduct from the award socialsecurity benefits, which the insuredhad been required to obtain due tothe insurer's failure to comply withits contractual obligations when itwrongly terminated the insured's

sickness and accident payments.Masel, Note 2 at 103-104; Mann,Note 2 at [14.10.3], [14.1 0.6J.

25. Baradom Contracting Pty Ltd (inliq) vGIG General Ltd (unreported)NSW Sup Ct, Allen J, 13 June 1996.Masel, Note 2 at 103; Gray, Note 1at 8; Mann, Note 2 at [14.10.7];Masel et al., Note 4 at [14.30J.

26. Speno Rail MaintenanceAustralia Pty Ltd vHamersley IronPty Ltd; Zurich Australian InsuranceLtd vHamersley Iron Pty Ltd [200 1)11 ANZ Ins Cas 61-485. CCH, Note9 at [6-025J.

27. Whilst an insurer can delay adetermination in relation to theclaim pending verification andinvestigation of the matter theymust carry out these tasks within atimely manner. Distillers CoBiochemicals (Aust) Pty Ltd vAjaxInsurance Co Ltd(1974) 130 CLR 1[' Distillers') per Stephen J at 31-32;Moss vSun Alliance Aust Ltd['Moss') (1990) 55SASR 145; 6ANZ Ins Cas 60-967; 93 ALR 592;Gutteridge, Note 12 per Ambrose Jat 11 ; Mann, Note 2 at [13.40.1],[13.40.8]; Gray, Note 1 at 8; Masel,Note 2 at 104; Yeldham, Note 3 at57-59; Moran, Note 5 at 9, 14;Tilbury, Note 10 at [28.28J.

28. RAFEngland vZurich AustralianInsurance Ltd[unreportedL DistrictCt of Adelaide, Kitchen J, 30 July1991. Masel et al., Note 4 at[13.90]; Gill et al., Note 7 at 2.

29. Moss, Note 27. Cf. reZurich,Note 12 where Chesterman J inobiter claimed that the obligation topay arose as a result of an impliedcontractual term, rather than anyduty of utmost good faith. Mann,Note 2 at [13.40.1]; Moran, Note 5at 14; Masel et al., Note 4 at[13.80].

30 Loa, Note 8 at 6.

31 . Distillers, Note 27 at 29, 31.Stephen J indicated that it would bea breach of the duty of an insurersimply to refuse to settle a claim,not because there were reasonable

prospects of a successful defence,but simply because it preferred notto make a settlement payment upto the full liability limit. Masel, Note2 at 104; Moran, Note 5 at 9-10, 17;Yeldham, Note 3 at 58,60; CCH,Note 9 at [5-630], [5-640], [23740]; Loa, Note 8 at 6; Eggers et al.,Note 5 at 12.45.

32. ACN 007, Note 11 per Olsson J.The insurer's had deliberately keptthe insured in the dark by defendingthe action despite the fact that theyhad already made a decision todeny the claim. The case can bedistinguished from Reid vCampbellWallis Moule & Co Pty Ltd [1990]VR 859 where there was a sufficientdisclaimer by the insurer and itssolicitors which enabled them topull out of the case albeit at the lastminute. Masel, Note 2 at 104;Mann, Note 2 at [14.10.9]; Tilbury,Note 10 at [28.28]; Gray, Note 1 at9.

33. Nigel. Note 14. Whilst this caseinvolves a claim under the WorkersCompensation legislation, to whichthe ICA does not apply, one of theclaims which were made felloutside the policy and hence thecourt examined the common lawduty of good faith, which whilstdifferent to that imposed by s.13ICA gives a good indication of thecourt's attitude to the issue. Masel,Note 2 at 104; Moran, Note 5 at lO11 ; Masel et al., Note 4 at [13.65J.

34. Wyllie vNational Mutual LifeAssociation ofAustralasia Ltd['Wyllie') [unreported) NSW Sup Ct,Hunter J, 18April1987; Edwards vThe Hunter Valley Co-op Dairy CoLtd & Anor(1992) 7 ANZ Ins Cas61-113; Beverley v Tyndall LifeInsurance Co Ltd(1999) 10 ANZ InsCas 61-453 which required ,thedisclosure of medical reports;Szusterv HestAustralia Ltd & Anor[unreported) District Court of SA,Herriman J, 6 March 2000. Mann,Note 2 at [13.40.1]; Masel, Note 2at 104; Yeldham, Note 3 at 60; CCH,Note 9 at [5-640]; Hilditch A,'Utmost Good Faith-Insurer's


Obligation to Disclose InformationRelied on in Considering Indemnity'(April2000) Ward & PartnersInsurance Bulletin 4,5; Hilditch A,'Insurer's Duty of Utmost GoodFaith-Does it Require Disclosure ofAll Information upon which it hasRelied in Forming an Opinion toDecline Indemnity?' (April2000)Ward & Partners-InsuranceBulletin 5,6.

35. Horryv Tate and Lyle RefineriesLtd, (1982) 2 Lloyds Reports 416.Moran, Note 5 at 8; Gill et al., Note7 at 3.

36. Stuart vGuardian RoyalExchange Assurance ofNewZealand Limited fNo.2j( 'Stuart')(1988) 5 ANZ Ins Cas 60-844.Yeldham, Note 3 at 59; CCH, Note 9at [5-640]; Loa, Note 8 at 6; Gill etal., Note 7 at 1-2.

37. This onerous obligation was anexample proposed by Hoffmann inhis paper. Hoffmann, Note 12;Yeldham, Note 3 at 60; Moran, Note5 at 19.

38. This involves the insurer tryingto negotiate settlement of a claimat a lower figure when they areprepared to pay a higher figure tosettle the matter. Hoffmann, Note12.

39. CCH, Note 9 at [4-215], [5-630],

40. For example, insuring a ship inrelation to avoyage which theinsurer knows has been completedor insuring a house against a risk offire with the knowledge that thehouse has been demolished. SeeBanque Financiere de la Cite SA vWestgate Insurance Co Ltd(' Banque') [1989] 2 All ER 952 perLord Jauncey. As this case wasdecided at common law the resultmay be different under the ICAwhere the Court has a discretion toapply ss.31 and 56. CCH, Note 9 at[5-630], [5-640].


42. Gill et al., Note 7 at 2.

43. Haghis Persian Carpet TradingCd vGeneral Accident Insurance Co


NZ Ltd(1990) ANZ Ins Cas 61-003.Gill et al., Note 7 at 2.

44. Kelly, Note 11 per Owen J at76,520. Mann, Note 2 at [13.40.5],[14.10.4]; Gray, Note 1at 8; Masel,Note 2 at 104; Tilbury, Note 10 at[28.28]; Cavanagh R, 'Interpretingthe Insurance Contract and theInsurance Contracts Act' (Paperpresented for members of the NSWBar Association as part of theContinuing Legal EducationProgram, Sydney, March 2001) 1,7;CCH, Note 9 at [5-640L

45. Hobartville Stud Pty Ltd vUnionInsurance Co Ltd ('Hobartville')(1991) 25 NSWLR 358; 6 ANZ InsCas 61-032 per Giles J. Tilbury,Note 10 at [28.28]; Mann, Note 2 at[13.40.2]; Gill et al., Note 7 at 3-4.

46. Komorowski vAustralian MotorInsurers(1996) 9ANZ Ins Cas 61303. Tilbury, Note 10 at [28.28];Gray, Note 1at 8; Cavanagh, Note44 at 7; Mann, Note 2 at [13.40.6J.

47. MassoudvNRMA Insurance Ltd(1995) 8ANZ Ins Cas 61-257.Mann, Note 2 at [13.40. 7J.

48. Distillers, Note 27 per StephenJ. Masel, Note 2 at 104.

49. Forexample, the CalifornianFair Claims Settlement PracticesRegulation. Brown M, 'The Insurer'sDuty of Good Faith and Fair Dealingwith his Insured under English Law'(1998) 4 IJIL250, 251.

50. Brown, Note 49 at 250-251;Moran, Note 5 at 21-22.

51. Gill et al., Note 7 at 2-3;Pickering MH, 'Conflicting Duties ofInsurance Lawyers andIntermediaries in ClaimsInvestigation and Management'(1989) 2 Insurance LawJournal 1,1-21; Yeldham, Note 3 at 62-67;Eggers et al., Note 5 at 13.03.

52. Gugliotti vCommercial UnionAssurance Co ofAustralia(' Gugliott/) (1992) 7ANZ Ins Cas61-104 per Fullagar J where thedriver of a motorvehicle which wasinvolved in an accident denied thatthey had been drinking alcohol.

Masel, Note 2 at 104-104; Gray,Note 1at 8; Mann, Note 2 at[13.40.4]; Tilbury, Note 10 at[28.28]; Cavanagh, Note 44 at 8;CCH, Note 9 at [5-630], [5-640J.

53. UBE Packaging Ltd vOBEInsurance (International) Ltd [1996]2 NZLR 467. Masel, Note 2 at 105.

54. NewZealand Insurance Co Ltd vForbes (1988) 5ANZ Ins cas 60871. CCH, Note 9 at [5-640J.

55. Newnham vBaker[1989] 1 QdR393. Gill et al., Note 7 at 3.

56. NSWMedical Defence UnionLtd vTransport Industries InsuranceCo Ltd ['NSW Medical Defence')(1985) 4 NSWLR 107. Gill et al.,Note 7 at 4.

57. Moraitis vHarvey Trinder (Old)Pty Ltd (1969) Qd R226, per Lucas Jat 235-236. Whilst this case wasdetermined at common lawarguably the same result would beachieved by application of the ICA,unless of course the fraud was of aminor nature enabling applicationof s.56(2). CCH, Note 9 at [5-640J.

58. The 'Litsion Pride', Note 5 perHirst J at 518-519. Mann, Note 2at[12.10.2]; Masel, Note 2 at 105.

59. NSW Medical Defence, Note 56;Leighton, Note 15. Mann, Note 2at[12.10.2]; Masel, Note 2 at 105.

60. Action Scaffolding vAMP Fire &General Insurance Co (NZ) Ltd(1990) 6ANZ Ins Cas 60-970. Cf.'The StarSea', Note 5where theHouse of Lords held negligence didnot constitute a breach of the duty.Gray, Note 1at 8; CCH, Note 9 at[5-630]; Masel et al., Note 4 at[13.70]; BirdsJ, 'Uberrima FidesWhat Use is the General PrincipleAny More?' (2001) Journal ofInsurance and Practice <http://www.shef.ac.uk/law/law343/starsea.htm> 1.

61. CCH, Note 9 at [5-630J.

62. See Note 38 above.

63. CCH, Note 9 at [5-630J.

64. Russell vNRMA Insurance Ltd[unreported) NSW Sup Ct, RogersCJ Comm 0,8 November 1988.Mann, Note 2at [13.30.2J.

65. Masel et al., Note 4 at [13.30J.

66. Trans Pacific, Note 6. Moran,Note 5 at 11.

67. Lampson (Australia) PtyLtdvAhden Engineering (Australia) PtyLtd[ 'Lampson') [unreported) QldSup Ct, Moynihan J, 28 May 1998.Gray, Note 1at 8; Masel, Note 2 at105; Masel et al., Note 4 at [13.69].

68. Barwon, Note 11. Masel, Note 2at 105; Tilbury, Note 10 at [28.28];Gray, Note 1at 8; Masel et al., Note4 at [13.68J.

69. Barwon, Note 11. Mann, Note 2at [14.1 0.8J.

70. Einfeld vHIH Casualty &General Insurance Ltd (1999) 10ANZ Ins Cas 61-450. Cf. Obitercomments of Chesterman J in FAIGeneral Insurance Co Ltd vAustralian Hospital Care Pty Ltd(1999) 10 ANZ Ins Cas 61-445.Mann, Note 2 at [13.40.10],[14.10.10]; Gray, Note 1at 8.

71. Tancredi, Note 6. Insurersshould bearthis in mind whennegotiating and preparingsettlement agreements. Gray, Note1at 8,14.

72. Swinbank vCleary[ 'Cleary')[unreported) NSW Sup Ct, EinsteinJ,16November1999.

73. Kin red, Note 16. Masel et al.,Note 4 at [13. 70J.

74. Banks, Note 24. Masel et al.,Note 4 at [14.20]; Gill et al., Note 7at 6.

75. Loa, Note 8 at 6-7.


77. Comunale v Traders & GeneralInsurance Co 328 P.2d 198 [Cal.1958). Brown, Note49at250.

78. Mann, Note 2 at [12.30];Yeldham, Note 3 at 70; Loa, Note 8at 7; ALRC 20, Note 5 at [328J.

79.ln Principal Financial Group vThomas [S.C. of Alabama July1991) a lady was awarded$1,000.00 in compensatorydamages and $750,000.00 inpunitive damages when she suedher insurerwho refused to pay forher child's funeral expenses. In FoxvHealth Net [Riverside CountyCalifornia Supreme Court, March1994) a husband and his threedaughters received $12,320,000.00in compensatory damages and$77,000,000.00 in punitivedamages when they sued thedeceased wife's/mother's insurerfor refusing to finance a bonemarrow transplant. Moran, Note 5at 22-23; Yeldham, Note 3 at 7072. See also Magarick P, ExcessLiability-Duties andResponsibilities of the Insurer[NewYork: 2nd ed, 1982) referred to byYeldham at 71.

80. ['Cedenco') (1997) 6 NZBLC102,221.

81. Cedenco, Note 80 per Salmon J.Loa, Note 8 at 7; Langstone C, 'BadFaith DamagesArrive in NewZealand' [June 1997) Jones Fee<http://www.jonesfee.co.nz/badfaith.htm> 1,1-3.

82. Aview supported by the EnglishCourt of Appeal in Banque, Note 40at 997 and Hawke, Note 12 at 93and 133 indicating that 'contractualdamages offer a perfectly adequatelevel of compensation and a moresecure cause of action'. ALRC 20,Note 5 at [328]; Mann, Note 2 at[12.30]; Masel, Note 2 at 102.

83. Gimson vVictorian WorkcoverAuthority[1995] 1VR 209 perMcDonald J; Gibson vParkesDistrict Hospital (1991) ['Gibson') 26NSWLR 9 per Badgery-Parker J.Mann, Note 2 at [12.30J.

84. Yeldham, Note 3 at 76; ALRC 20,Note 5 at [328J.

85. See Moss, Note 27 per Bollen Jwho indicated that in an appropriatecase exemplary or punitivedamages may be awarded for abreach of the duty of utmost good


faith. Cole TRH, 'Law - All in GoodFaith' (1994) 10 BCL 18,28.

86. The US tort of bad faith casessupport this view as doesTransthene Packaging Co Ltd vRoyal Insurance (UK) Ltd [1996]LRLR 32 per Kershaw J at 40-41 ;Stuart, Note 36 per Herron J; PrideValley Foods Limited vIndependentInsurance Company Limited[unreported) UK CA, 27 February1997. See also the discussion belowin relation to Moss, Note 27. Cf.Irving vManning (1847) 1HLCas287; Ventouris vMountain ('TheItalia Express') No. 2[1992] 2Lloyd's Rep 281; Callaghan vDominion Insurance Co Ltd[1997] 2Lloyd's Rep 541. Sutton, Note 13 at106; Gray, Note 1at 12; Eggers etal.,Note516.71,16.107;CCH,Note9 at [23-330].

87. Gray, Note 1at 13.

88. Note 83.

89. Gibson, Note at 83. Moran, Note5 at 12-14; CCH, Note 9 at [5-640];Cameron R, 'Non-contractual Dutyof Utmost Good Faith Considered bySu preme Cou rt' (1992) 6[ 1)Commercial Law Quarterly 11, 12.

90. Gibson, Note 83 per LordBadgery-Parker J. Moran, Note 5at 13; Cameron, Note 89 at 12.

91. ['Dorrough') (1995) 8 ANZ InsCas 61-290. CCH, Note 9 at [5640].

92. Note 83. CCH, Note 9 at [5640].

93. Note 36.

94. CCH, Note 9 at [23-330J.

95. CCH, Note 9 at [23-330J.

96. Edwards & Anor vAA MutualInsurance Co (1985) 3ANZ Ins Cas60-668 per Tompkins J at 79,174;Stuart, Note 36 per Heron J at75,281-75,282. CCH, Note 9 at [23350J.

97. [2001] NSWCA38 [unreported),New South Wales Court of Appeal,6 March 2001. See obiter


comments by Powell JA atparagraph 4 of the judgement.

98. ['Bankstown') (1997) 187 CLR384.

99. Eggers et al., Note 5 at 16.3816.40,16.49-16.50,16.69-16.72.

100. [unreported) 21 October 1983,Lexis per Hodgson J at 14.

101. Note 36 per Heron J at 75,280.

102. Note 86.

103. Note 86 at 293.

104. Brown,Note49at257.

105. [1997] CLC 70.

106. Brown, Note 49 at 259.

107. (1992) 7ANZ Ins Cas 61-109.Hawke, Note 12 at 136-137.

108. Hawke, Note 12 at 136-137.

109. (1999) 10 ANZ Ins Cas 61-420

110. PengilleyW, 'The Impact ofConsumer Protection LawonInsurance Claims' (2001) 13Insurance LawJournal 1,9, 35.

111. Peterson J, 'The Duty of GoodFaith in Insurance Relationships:The Decision in Gibson vParkesDistrict Hospital' (1994) 24 VUWLR189,207.

112. s.57(2) ICA. Mann, Note 2at[57.10]; Pengilley, Note 110 at 1516.

113. s.57(3) ICA. Mann, Note 2at[57.10]; Pengilley, Note 110 at 15.

114. In HungerfordsvWalker(1989) 171 CLR 125; 84ALR 119the High Court relying on theprinciples laid down in Hadley vBaxendale (1854) 9 Ex 34; 156 ER145, sanctioned an award ofdamages byway of compoundinterest forthe period the insuredwas denied access to the funds. TheCourt distinguished interest ondamages from a damages awardwhich sought to compensate aparty, by reference to interest, forthe loss of use of the money wheresuch a loss was reasonablyforeseeable. Mann, Note 2at[57.10.2]; CCH, Note 9 at [23-330J.

115. Note 27.

116. Mann, Note 2at [13.20.5],[13.40.1], [57.10.2]; Masel et al.,Note4at [13.110J.

117. Awaiting a police report didnot equate to reprehensibleconduct. Moss, Note 27. Cf. reZurich, Note 12. Moran, Note 5at15-16; Mann, Note 2 at [13.40.1].

118. Walker v FAI Insurance Ltd(1991) 6 ANZ Ins Cas 61-081;Hobartville, Note 45 per Giles J;Bankstown Football Club vCICInsurance Ltd[unreported) NSWSup Ct, Cole J, 16 December 1993.Mann, Note 2 at [57.1 0.2J.

119. (1989) 92 ALR 299; 5 ANZ InsCas 60-902 at 351; 75,751. Mann,Note 2 at [57.10.1], [57.1 0.2J.

120. ALRC 20, Note 5 at [323],[324]; Mann, Note 2 at [57.10],[57.10.1], [57.1 0.2J.

121. ('Swinbank') [unreported) FedCt FC, 7 February 2000, at 11. Mann,Note 2 at [57.1 0.2J.

122. Swinbank, Note 121 at 11.Mann, Note 2 at [57.1 0.2J.


124. Note 15.

125. Note 67.

126. Gray, Note 1at 13; CCH, Note9 at [5-640], [6-01 0].

127. s.12 ICA; Notes to the DraftInsurance Contracts Bill 1982;Tilbury, Note 10 at [28.26]; Mann,Note 2 at [12.20.1]; Gray, Note 1at6; CCH, Note 9 at [5-640J.

128. Note 11.

129. Barwon, Note 11 at 74,774.Finn suggests that the duty ofdisclosure arises from a number ofsources-the duty of utmost goodfaith pursuant to s.13 of the ICA, theTrade Practices Act 7974 [Cth),equitable estoppel and negligence.Finn PO, 'Good Faith and FairDealing' (1990) 5(9) AustralianInsurance Law Bulletin 101, 108;Finn PO, 'Good Faith and FairDealing [Pt 2)' (1990) 5(10)

Australian Insurance Law Bulletin109, 109-110. Cf. PermanentTrustee v FAI(1998) 44 NSWLR 186per Hodgson J indicating that wherenon-disclosure is established s.13adds nothing to s.21. Mann, Note 2at [12.20.1]; CCH, Note 9 at [6010]; Masel et al., Note 4 at [13.95J.

130. LBC, Note 19 at [67J. See alsoEntweUs v National &General['Entwells') (1991) 6ANZ Ins Cas61-059 which indicated that itwould conflict with the legislativeintent if the remedy for breach ofs.13 was greater than that providedfor in s.54. Gill et al., Note 10 at 82.

131. Gray, Note 1at 19; Mann,Note 2 at [48.10]; Cavanagh, Note44 at 12.

132. Note 34. Mann, Note 2 at[13.10.1]; Masel, Note 2 at 105.

133. CE Heath Casualty andGeneral Insurance Ltd v Grey(1993) 32 NSWLR 25 per MahoneyJA at 36-38-third party may owe aduty of utmost good faith to theinsurer; 7ANZ Ins Cas 61-199;Dorrough I Note 91-insurer mayowe a duty of utmost good faith to athird party. Mann, Note 2at[14.10.5]; Gray, Note 1at 8, 19;Masel, Note 2 at 105; CCH, Note 9at [5-630].

134. Wyllie, Note 34 per Hunter J at21. Mann, Note 2 at [13.10.1]; CCH,Note 9 at [5-630], [5-640]; Maselet al., Note 4 at [13.130J.

135. Mann, Note 2 at [13.20.0];Gray, Note 1at 19.

136. Mann, Note 2 at [13.20.3J.

137. Sutton, Note 13 at 108; Gray,Note 1at 17.


139. Note 130at77,136.

140. The Magistrate at firstinstance in Tiep Thi To vAustralianAssociated Motor Insurers Ltd[ 'Tiep Thi To') (2001) 11 ANZ InsCas 61-490, see Buchanan JAat75,662 found that whilst theappellant had breached the duty ofutmost good faith, as the interests

of the insurerwere not prejudiced,s.54 precluded the insurerfromrefusing to pay the claim.

141. EntweUs, Note 130 per Ipps Jat 77,136. Hawke, Note 12 at 131;Mann, Note 2 at [13.20.3]; Gray,Note 1at 18; Masel et al., Note 4 at[13.100J.


143. Note 130. Mann, Note 2 at[13.20.3J.

144. TarrM, 'Dishonest InsuranceClaims' (1988) 1 Insurance LawJournal 42, 58.

145. Yeldham, Note 3 at 57.Unfortunately, Justice Buchanan JAwho delivered the principlejudgment in Tiep Thi To, did not dealwith the relationship between ss.13and 54, concluding that s.54 was notapplicable in circumstances offraud which must be dealt withunder s.56. Tiep Thi To, Note 140per Buchanan JA at 75,665.146.Sections 12 and 13 of the ICA.

147. Derry v Peek (1889) 14AC337at 375; Re London and GlobeFinance Corp Ltd(1903) 1Ch 728per Lord Buckley at 732-733.Henchliffe, Note 12 at 214; Sutton,Note 13 at 106.

148. Tarr, Note 144at58;TarrAA,'Insurance Law and the Consumer'(1989) 2 Insurance LawJournal106,116-117.

149. Marksand Balla, Guidebookto Insurance Law in Australia[Sydney: CCH Australia Ltd, 2nd ed,1987) 334.

150. Note 140 per Charles JA at75,661.

151. Tiep Thi To, Note 140 perCharles JA at 75,661.

152. Tiep Thi To, Note 140 perBuchanan JA at 75,665; Gugliotti,Note 52 per Fullagar J. Cf. Entwells,Note 130 per Ipps J. Hawke, Note12 at 131-132; Henchliffe, Note 12at 228; Mann, Note 2 at [13.20.3],[13.20.4]; LBC, Halsbury's Laws OfAustralia, Vol22 [at 11 March 2002)22 Insurance and Income Security,


'Chapter 11 Part D DishonestClaims' [188].

153. Note 5, which involved amarine insurance claim ratherthana claim under a s.13 ICA typeprovIsion.

154. The House of Lords rejectedHirst J's findings in The LitsionPride, Note 5, that in the claimscontext the duty of utmost goodfaith extends to include culpablenon-disclosure ormisrepresentation. Hearn G, 'Houseof Lords: "The Star Sea'" (March2001) Fernandes Hearn LLPNewsletter 1,2; Flynn M, "'UtmostGood Faith" In Marine InsuranceContracts' (Paper presented at theMaritime LawAssociation ofAustralia and NewZealandConference, Wairakei, April2001) 1;Eggers et al., Note 5 at 11.9511.96.

155. The House of Lords left openfor future litigation the question ofwhether the existence of fraud atthe time the claim is made willenable the insurerto avoid thecontract, repudiate the claimentirely or repudiate the policy fromthe time of the breach. CoquhounM, 'Is There a Limit to theContinuing Duty of Good Faith?'(February 2001) Insurance Times 1,1-2; Birds, Note 60 at 2; Eggers etal., Note5at 11.95-11.96,11.10911.127.

156. Some would argue this isconsumer protectionism gone mad.See Royal Boskalis Westminster vMountain [1997] LRLR 523 and 'TheMercandian Continent' K!S MereScandia v Certain Lloyd'sUnderwriters [2001] 2 LLR 563, forfurther examples of cases limitingthe insurer's ability to avoid claims.Summer J, 'Limited Good Faith'(2001) 15 The MaritimeAdvocate. com <http://www.maritmeadocate.com/i15 inth.htm>l, 2; Shepherd M,Illingworth M and Weir A,'Insurance Claims-The Impact ofFraudulent Devices' (March 2002)


INCE & Co: Insurance Law Bulletin1,3; Flynn, Note 154 at 2.

157. Gibson, Note 83 per BadgeryParker J. Cameron, Note 89 at 12;Gill et al., Note 3 at 19; Hawke,Note 12 at 141 ; Pengilley, Note 110at 1; Cole, Note 85 at 32.

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THE DUTY OF UTMOST GOOD FAITH · The Scope of the Duty of Utmost Good Faith It is imperativethat both the insurer and insured participate in all contractualnegotiations,4as the dutyof