REFORMING INSURANCE LAW: - Law Commission

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considered whether s 15 should be repealed.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