REFORMING INSURANCE LAW: - Law Commission

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purpose, 232 proof of honesty is not of itself enough to establish utmost good faith so that an honest act may nevertheless be one carried out without utmost good faith. 233 How, then, has the implied term operated in practice? The continuing duty of the assured 5.5 As noted above, English law does not impose any stand alone continuing duty of utmost good faith on the assured, but retains a continuing duty: (a) where there is an express disclosure obligation, in which case a breach of the obligation other than with the utmost good faith and in a manner which induces the insurers in some way triggers the parallel duty of utmost good faith allowing the insurers either to terminate the policy for repudiation or to avoid the policy; and (b) where the court feels it appropriate to imply a term for disclosure in particular circumstances. The Australian legislation deals with the matter in an entirely different way, by means of the implied term of utmost good faith in s 13 of the Insurance Contracts Act 1984. Where the Act applies there is no continuing duty at common law and obligations to disclose must be express, although where the Act does not apply the common law position prevails and there may be a parallel common law duty to disclose if it is attached to an express contractual obligation to disclose. 234 The remedy for breach is damages, and in addition the insurers may cancel the policy on notice. 235 There is little authority on the scope of the assured’s duty, although it seems that the remedy for breach of duty is governed by the provisions of s 54. 236 Fraudulent claims are governed independently by s 56. 237 In practice, s 13 has little or no independent application to policyholders. The assured is also subject to the specific obligation in s 14 not to rely on policy terms other than in accordance with the principles of utmost good faith, although there is no breach of this provision simply because the assured has brought a claim under the policy, 238 has sought to rely upon a waiver of rights by the insurers 239 or has broken a policy term and has sought relief from the consequences of his breach under s 54. 240 232 Re Zurich Australian Insurance Ltd (1999) 10 ANZ Ins Cas 61-429. 233 Gutteridge v Commonwealth of Australia 1993, unreported; Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185. 234 New South Wales Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1985) 4 NSWLR 107; GIO Insurance Ltd v Leighton Contractors Ltd Pty Ltd (1996) 8 ANZ Cas 61-293. 235 Insurance Contracts Act 1984, s 60(1)(a). 236 See infra. 237 See infra. 238 CIC Insurance Ltd v Barown Region Water Authority (1999) 10 ANZ Ins Cas 61-425. 239 Sherry v FAI General Insurance Co Ltd (2002) ANZ Ins Cas 61-516. 240 Einfeld v HIH Casualty & General Insurance Ltd (1999) 10 ANZ Ins Cas 61-450. 50
The continuing duty of insurers 241 5.6 The insurers’ continuing duty of good faith is set out in s 13 of the Insurance Contracts Act 1984, and its framed as an implied term. To what does it apply? To date the section has not really been tested. The ALRC’s view was that it applies to “all aspects of the relationship between insurer and assured”. 242 It is to be remembered that in all cases there has to be proof that the insurers’ conduct was not carried out with utmost good faith, but if that is established then the following classes of conduct in principle fall within s 13. 5.7 First, insurers are required to notify the assured of matters relating to the policy. They are under a statutory duty under s 22 to inform the assured of the consequences of non-disclosure. In addition, s 14 provides that a provision of an insurance policy can be relied upon only in the utmost good faith, a provision which by its terms is one primarily concerned with the conduct of insurers 243 and which works in tandem with s 13. By application of ss 13 and 14 it has been held that insurers must inform the assured of the nature and consequences of any breach of a policy term 244 and may not plead policy defences other than with the utmost good faith. 245 There are also cases which hold that the insurers must draw the assured’s attention to the possibility that the policy is not suitable for his needs, eg, that he is underinsured. 246 In applying s 14, the court must – under s 14(3) – have regard to whether the assured received notification of the term: there is in any event an obligation in s 37 for insurers to notify the assured of any unusual term in advance of the policy being made where the policy is not prescribed. 247 Most domestic policies are prescribed and are subject to the special rules on standard cover, discussed above. The obligation to notify unusual terms is thus confined to commercial policies. Treasury Review II, 2004, has suggested that s 14 has greater potential than to date has been realised, and that it could be extended from reliance on policy terms other than with the utmost good faith to all obligations 241 Section 15 of the 1984 Act disapplies all other legislation, including Commonwealth, State or Territory legislation which allows for judicial review of unfair contracts. Treasury Review II, 2004, paras 6.4 to 6.14 considered whether s 15 should be repealed. The arguments proved to be finely balanced, but the Review concluded that no change should be made in the short term, although wished the matter to be reopened following a review of unfair terms legislation. The point is only open to a limited extent in England. The Unfair Contract Terms Regulations 1999 apply to consumer insurance contracts, and are required to do so by the Directive on which the Regulations are based, Directive 93/13/EC. The Unfair Contract Terms Act 1977 does not apply to insurance contracts: Law Commission Report 292 on Unfair Contract Terms did not recommend any substantial change to this rule. 242 ALRC 20, para 328. See: Mannolini “The Uncertain Ambit of Section 54 of the Insurance Contracts Act” (1996) 24 Australian Business Law Review 260; Bremen, “Good Faith and Insurance Contracts — Obligations on Insurers” (1999) 19(1) Australian Bar Review 89; Godfrey, “The duty of utmost good faith — the great unknown of modern insurance law” (2002) 14 Ins LJ 56. 243 But not exclusively so. See supra. 244 Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61, a decision doubted in Re Zurich Australian Insurance Ltd (1999) 10 ANZ Ins Cas 61-429, on the basis that it elevated the duty to act in good faith into a duty to “coddle the insured”. The principle is nevertheless established: Banks v NRMA Insurance Ltd 1988, unreported, NSW Supreme Court. 245 ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374. 246 Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197. 247 It was held in Porter v GIO Australia Ltd [2003] NSWSC 668 that if the assured uses a broker then s 71 dispenses with the need for s 37 notice. It was further held that the insurers do not owe a separate duty of utmost good faith under s 13 to notify the assured in the absence of any duty under s 37. 51
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
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Page 20 and 21: easonable proposer for a marine pol
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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 48 and 49: utmost good faith. 218 The remedy i
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
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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
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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
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disputes as to whether the correct
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interests to do so. However, insure
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Matters in the 1984 Act already a p
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