REFORMING INSURANCE LAW: - Law Commission

5.14 A second obvious possibility is an obligation on insurers to process and pay claims within a
reasonable time failing which they face liability for consequential loss. Utmost good faith could,
therefore, be the basis on which insurers are liable for consequential loss arising from late or
non-payment. The question of late payment is considered in more detail below.
5.15 A third is that insurers faced with an option under the policy should be placed under an
obligation to define their position within a reasonable time. This could apply to decisions to
affirm or to deny cover, to decide whether or not to pay defence costs and to decide whether or
not to defend a claim. At present English law imposes limited duties in these contexts, which at
their highest allow the courts to intervene on a judicial review basis by requiring insurers to
reach their decisions only by taking into account considerations relevant to the policy in question
and not by reference to extraneous considerations such as a desire to exercise leverage in other
dealings or disputes between the parties. Imposing an obligation to act with the utmost good faith
might not, however, produce a dramatic change: a decision which is based on extraneous
considerations is plainly not one made in accordance with the principle of utmost good faith,
whereas a decision reached using the proper criteria but which the court or other insurers would
not have reached cannot for that reason alone be classified as having been made with an absence
of utmost good faith. A codification of English law to this effect would encompass the specific
principle in s 41, which is confined to timely confirmation or denial of coverage under liability
policies, and would also confirm the existence of a remedy of damages for breach of contract, a
step presently beyond the English courts.
5.16 A fourth possibility is that insurers should be liable for failing to pay a claim to which they
know they have no valid defence: this is more or less equivalent to s 14 of the 1984 Act. This is,
unfortunately, a tactic commonly encountered, particularly in the commercial market. It might
also be sensible to codify the rule that liability insurers must avoid conflicts of interest and must
take into account the interests of their assured in negotiating with third parties. All of these
points have been held to fall within s 13 of the 1984 Act.
6 FRAUDULENT CLAIMS
6.1 This topic is dealt with here because of its historical links with the assured’s continuing duty
of utmost good faith. In both England 262 and Australia 263 fraudulent claims have now been
262
K/S Merc Skandia XXXXII v Certain Lloyd’s Underwriters [2001] Lloyd’s Rep IR 802; Agapitos v Agnew [2002]
Lloyd’s Rep IR 573.
263
The authorities favour the proposition that the rules which govern fraudulent claims are distinct from the
assured’s duty to act with the utmost good faith in s 13 (even though a fraudulent claim is possibly the paradigm
example of bad faith, as where the assured gives a false answer to a question in a claim form), and also from the
rules which preclude insurers from relying on policy defences in s 54: Entwells Pty Ltd v National and General
Insurance Co Ltd (1991) 6 WAR 68; Gugliotti v Commercial Union Assurance Co of Australia (1992) 7 ANZ Ins
Cas 61-104; Tiep Thi To v AAMI Ltd (2001) 161 FLR 61; Walton v The Colonial Mutual Life Assurance Society Ltd
[2004] NSWSC 616.
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