REFORMING INSURANCE LAW: - Law Commission

may be a breach of the duty. 257 However, there is no breach of duty simply because the insurers
assert a defence which is ultimately shown to be unfounded: the insurers’ conduct must be in
breach of the duty of utmost good faith before s 13 applies. 258 In the same way, insurers who
exercise their right to cancel the policy cannot be said to have acted without utmost good faith
even if they have taken steps to settle the claim prior to their cancellation. 259 The proposals of
Treasury Review II, and the provisions of the draft Insurance Contracts Amendment Bill 2007 to
tighten controls over claims handling through self-regulation and ASIC enforcement, were
referred to earlier.
5.10 Fourthly, insurers who make late payment may face liability for damages for breach of duty
in respect of consequential loss, as well as interest on the sum payable under s 57. 260
Comment
5.11 The author’s discussions in Australia demonstrate that the implied term in s 13 of the 1984
Act has not given rise to particular problems in practice, although it is also apparent that it has
provoked a good deal of litigation both with respect to its own meaning and with respect to its
interrelationship with other provisions of the 1984 Act. If the UK is to adopt an implied
obligation on the parties to act with the utmost good faith, it would be possible to avoid some of
the short term dislocation by specifically legislating to remove the legislative drafting matters
which have exercised the Australian courts. Is that enough to justify acceptance? As far as the
assured’s obligations are concerned, the post-contractual duty of utmost good faith adds little to
his express obligations and to the duty not to submit fraudulent claims. The efficacy of s 13 is,
accordingly, to be assessed from the point of view of insurers.
5.12 Some of the decisions may be criticised in holding insurers liable for breach of contract
simply because they chose to take policy defences, even if those defences ultimately proved
unsustainable. That aside, the main problem is uncertainty. It is necessary for there to be clear
guidance as to the meaning of utmost good faith, particularly if it is to operate in the commercial
insurance and reinsurance markets. By definition the duty of utmost good faith operates both on
express terms, and may also imply obligations where there are no express terms. Given the width
of the concept it may be preferable for any UK legislation to provide an exhaustive or, if greater
flexibility is preferred, non-exhaustive illustrative list of obligations rather than leaving the scope
of the concept unarticulated.
5.13 Disclosure of unusual policy terms is one area where English law could usefully be
changed. The concept is recognised by the common law, 261 but has never been applied to
insurance.
257
Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd [2002] NSWSC 1006 (affirmed [2003] NSWCA 356)
where it was said that reliance on an ambiguous clause would lead to summary judgment and an indemnity costs
order.
258
Komorowski v Australian Associated Motor Insurers (1996) 9 ANZ Ins Cas 61-303.
259
Massoud v NRMA Insurance Ltd (1995) 8 ANZ Ins Cas 61-257.
260
See supra.
261
Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433.
53