REFORMING INSURANCE LAW: - Law Commission

of the insurers under the policy, under the Insurance Contracts Act 1984 and under any terms
implied into the policy under the general law. 248
5.8 Secondly, insurers are under a duty to reach a timely decision on a claim. 249 There is a
limited specific provision to this effect, in s 41 of the Insurance Contracts Act 1984 which seeks
to overcome the problems raised by the decision in Distillers Co Biochemicals (Aust) Pty Ltd v
Ajax Insurance Co Ltd. 250 There, the insurers of the assured manufacturers of the drug
“Thalidomide” refused to confirm or deny coverage in respect of massive claims faced by their
assured. The policy stated that the assured was not to make any admission of liability without the
written consent of the insurers. In proceedings for declaratory relief brought by the assured, it
was held that any settlement by the assured without the insurers’ consent would preclude
recovery even if there would otherwise have been liability under the policy. The ALRC’s view
was that the assured should be able to put the insurers to election within a reasonable time
between confirmation or denial of cover. 251 The recommendation was enacted in s 41, which
applies to any clause which prohibits a settlement or an admission of liability with out the
consent of the insurers. 252 The assured may give notice to the insurers asking for a decision
within a reasonable time on coverage and on whether the insurers intend to defend the claim: in
the absence of a decision, compliance with the clause is waived. Treasury Review II, the
recommendations 253 of which have been adopted by the draft Insurance Contracts Amendment
Bill 2007. Under the proposed revised version of s 41 the right to information will be extended to
third party beneficiaries, defined as persons with a right to claim under the policy
5.9 Thirdly, insurers are under a duty to settle claims in good faith. This appears from the ALRC
Report itself. 254 Thus insurers must act with the utmost good faith in deciding whether the
assured has made out a claim under the policy, eg, for the purposes of an accident policy in
determining whether the assured is totally and permanently disabled, 255 or as to the amount due
to the assured under the policy. 256 Again, reliance on potential ambiguity in the insuring clause
248
Recommendation 6.16. This was thought to be a substitute for the application of unfair terms legislation: see
supra. The recommendation has been accepted by the draft Insurance Contracts Amendment Bill 2007, which would
amend s 14(1) to extend its scope to “reliance … on a provision of the contract or a provision of this Act …”
249
Gutteridge v Commonwealth of Australia 1993, unreported, Queensland Supreme Court; AMP Financial
Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185; Baulderstone Hornibrook Engineering Pty Ltd v
Gordian Runoff Ltd [2006] NSWSC 223. Treasury Review II, 2004, Recommendation 1.1 was that “Best practice
guidelines relating to claims handling processes by insurers should be developed and included in the relevant
industry codes.” The Code of Practice now requires a response within 60 days. It could be argued that any failure to
comply should automatically lead to a finding of bad faith.
250
(1973) 130 CLR 1.
251
ALRC 20, paras 234 and 244.
252
Sutton, paras 15.41 to 15.44.
253
In particular Recommendation 10.1
254
ALRC 20, para 328.
255
Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372; McArthur v Mercantile Life
Insurance Co Ltd [2002] 2 Qd R 197.
256
Ibrahim v Greater Pacific Life Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-330. Cf Dumitrov v S C Johnson &
Son Superannuation Pty Ltd [2006] NSWSC 1372.
52