REFORMING INSURANCE LAW: - Law Commission

utmost good faith. 218 The remedy is contractual, so that the measure of damages is that for breach
of contract, 219 and the ALRC took the view that this approach was preferable to the introduction
of a possible tort of bad faith. 220 The phrase “arising under or in relation to” is a wide one, and is
potentially capable of encompassing settlements of liability reached under the policy. The duty is
expressed by s 12 to be paramount, and will apply irrespective of any express obligations which
arise under the terms of the policy. The paramount status of the implied term has given rise to
some confusion with regard to the relationship between s 13 and ss 54 (inability of insurers to
rely upon policy terms to refuse to pay claims in absence of causal link between breach and loss)
and 56 (no obligation to pay fraudulent claims). It is thus possible to argue that the insurers who
establish a breach of the duty of utmost good faith by the assured are unable under s 54 to rely
upon it to refuse to pay a claim unless the breach has given rise to the loss in respect of which the
claim is made. 221 The problem here is that a breach of s 13 is a straightforward breach of contract
which gives rise to damages, 222 whereas s 54 is concerned with payment or non-payment of
claims. Similarly, a fraudulent claim contrary to s 56 allows the insurers to refuse to pay the
claim and to cancel the policy but does not contemplate damages. 223 Any adoption of the implied
term approach in the UK should make it clear that good faith, express terms and fraudulent
claims are entirely separate concepts. In practice, allegations of breach of the implied term of
utmost good faith are more often made by the assured against the insurers than vice versa.
5.2 There is nothing in s 13 which deals with the duration of the post-contractual duty. In The
Star Sea the House of Lords held that the duty came to an end once legal proceedings
commenced, and it would appear to be sensible to codify this rule. 224
5.3 At present s 13 has purely civil consequences as between the parties. However, Treasury
Review II was firmly of the view that enforcement of the duty if left in the hands of private
assureds might not be fully effective. Accordingly, it recommended 225 that any failure by
insurers to act with the utmost good faith should be both a breach of an implied contractual term
and a breach of the 1984 Act, thereby attracting the regulatory powers of ASIC, although the
breach of the Act should not be an offence and should not attract a penalty. This
recommendation was adopted by the Treasury in the draft Insurance Contracts Amendment Bill
2007. The primary concern in this regard was claims handling, and in particular the need to
218
ALRC 91, paras 10.136-10.150, recommended the same approach for marine insurance, but coupled with the
right of the insurers to impose an express contractual duty on the assured dealing with post-contract disclosure.
219
Moss v Sun Alliance Aust Ltd (1990) 55 SASR 145; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR
64.
220
ALRC 20, paras 51 and 328. There is some authority in Australia for the proposition that a tort of bad faith may
operate in cases to which the 1984 Act does not apply: see the authorities cited by Mann, para 12.30. The possibility
of a tort claim based on the 1984 Act has, however, been denied: Lomsargis v. National Mutual Life Association of
Australasia Ltd [2005] QSC 199 The English courts have, rightly it is submitted, set their faces against the
intervention of tort into this area: La Banque Financière de la Cite SA v Westgate Insurance Co. Ltd [1990] 2 All
ER 947.
221
See Ipp J in Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68, 77, favouring the view
that the only remedies open to the insurers for breach of s 13 are those stipulated in s 54.
222
ALRC 20, para 328.
223
ALRC 20, para 243. See the discussion of fraudulent claims, infra.
224
Cf ALRC 91, para 10.142. See also Allison Pty Ltd v Lumley General Insurance Ltd [2004] WASC 98.
225 Recommendation 1.2.
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