REFORMING INSURANCE LAW: - Law Commission

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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. 48
ensure that: insurers operate procedures under which: claims handling is conducted in a fair, transparent and timely manner; assureds have the opportunity to respond to adverse findings by insurers and receive reasons for the denial of claims; employees and outsourced service providers involved in the claims handling process receive adequate training and supervision; insurers are liable for the conduct of outsourced providers involved in the claims handling process; and experts involved in the claims handling process are independent. The Treasury in its explanatory notes to the 2007 draft Bill felt that this could be achieved by a combination of selfregulation and also enforcement by ASIC. The former in practice operates under the General Insurance Code of Practice adopted by the Insurance Council of Australia in July 2005. The latter is to be achieved by an amendment to s 13 of the 1984 Act. Section 13 becomes s 13(1), and new s 13(2) will provide that “A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act.” One significance of treating a breach of the duty of utmost good faith as a breach of the Act is that under s 55A of the Act 226 ASIC may bring a representative action against an insurer if it is satisfied that the assured has or is likely to suffer damage and it is in the public interest to bring the action. 227 The 2007 draft Bill will further strengthen the powers of ASIC by adding new s 11F to the 1984 Act: this states that ASIC may intervene in any proceedings relating to a matter arising under the Act, in which case it is taken to be a party to the proceedings and may appear and be represented. The proposed s 11F procedure is likely to be quicker and easier than a full representative action, given that proceedings are already in existence. The meaning of utmost good faith 5.4 The 1984 Act does not define “utmost good faith”. The most detailed analysis is that of Professor Sutton, 228 who has defined the concept in terms that it: 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. Decided cases have referred to honesty, 229 or the absence of “dishonest, unreasonable or capricious conduct”. 230 However, it is to be noted that the word “utmost” indicates that something more than honesty is required, 231 so that while dishonesty prevents a finding of good faith on the basis that a dishonest act is by definition one which is performed for an improper 226 Added in 1994. 227 It is also significant in that ASIC has various remedies under the Corporations Act 2001 in respect of the licensing of insurers, and a breach may lead to the removal or suspension of a licence or the imposition of conditions. 228 Para 3.7. 229 Vermuelen v SIMU Mutual Assurance Association (1987) 4 ANZ Ins Cas 60-812. 230 Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197. See also CIC Insurance v Barwon Region Water Authority (1999) 10 ANZ Ins Cas 61-425. 231 Sheldon v Sun Alliance (1989) 53 SASR 97; AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185. 49
Page 1: REFORMING INSURANCE LAW: IS THERE A
Page 4 and 5: 6 FRAUDULENT CLAIMS 6.1 Meaning of
Page 6 and 7: legislation as it relates to substa
Page 8 and 9: different fate. On 9 September 1976
Page 10 and 11: invaluable in that it was devised a
Page 12 and 13: in deciding whether or not to appro
Page 14 and 15: 3.8 As regards misrepresentation, t
Page 16 and 17: with the duty of disclosure unless
Page 18 and 19: confirmed by s 28 which requires th
Page 20 and 21: easonable proposer for a marine pol
Page 22 and 23: in the revised version of s 22 set
Page 24 and 25: 4.23 The section is hardly a model
Page 26 and 27: elevant to the decision of the insu
Page 28 and 29: treated as misrepresentation if it
Page 30 and 31: therefore, an assured who uses a br
Page 32 and 33: the matter could be resolved by an
Page 34 and 35: here, in that there can be non-disc
Page 36 and 37: Cases other than fraud: damages 4.5
Page 38 and 39: elevant facts or the assured’s mi
Page 40 and 41: and investment policies with surren
Page 42 and 43: developed has raised exactly the sa
Page 44 and 45: Co-assureds 4.68 English law draws
Page 46 and 47: Temporary cover 206 4.72 English la
Page 50 and 51: purpose, 232 proof of honesty is no
Page 52 and 53: of the insurers under the policy, u
Page 54 and 55: 5.14 A second obvious possibility i
Page 56 and 57: has been held - perhaps inconsisten
Page 58 and 59: is unduly harsh. Whatever the effec
Page 60 and 61: 56(2), 298 and that what is require
Page 62 and 63: Warranties of fact 7.3 Warranties o
Page 64 and 65: person not to do the act or to avoi
Page 66 and 67: the risk and is purely administrati
Page 68 and 69: 7.14 The position in Australia has
Page 70 and 71: personal injury claim failure by th
Page 72 and 73: 7.20 Treasury Review I, 2003, found
Page 74 and 75: Continuing obligations in marine in
Page 76 and 77: contributed to by the illegality an
Page 78 and 79: waters, 391 that the classification
Page 80 and 81: changing market, and the Court of A
Page 82 and 83: unresolved issues as to whether the
Page 84 and 85: 8.14 Although the point is not fina
Page 86 and 87: which the need for each of the part
Page 88 and 89: Review II, 2004, as an appropriate
Page 90 and 91: 8.21 Finally, s 68 seeks to protect
Page 92 and 93: also include an address and telepho
Page 94 and 95: Standard cover 8.28 Standard cover
Page 96 and 97: period. In addition, such policies
Page 98 and 99:
(the existing s 40(1)); or (b) the
Page 100 and 101:
disputes as to whether the correct
Page 102 and 103:
interests to do so. However, insure
Page 104 and 105:
Matters in the 1984 Act already a p
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