Revisiting the duty of utmost good faith (and a win for insurers)

In December 2023, the Federal Court handed down its decision of ASIC v Zurich Australia Limited (No 2) [2023] FCA 1641. The court determined that an insurer did not breach its duty of utmost good faith through the steps it took to avoid an insured’s cover due to fraud.

This is an important case for the insurance industry, providing practical insight into how a court examines an insurer's duty and the processes adopted by an insurer in avoiding cover.

Background

The insured sought the assistance of a financial adviser, who then helped the insured to receive income protection and life cover with the insurer.

After the insured made a claim on her income protection policy, the insurer discovered the insured had not disclosed previous mental health issues dating back to 2001 and 2005. The insurer first issued a letter to the insured to inform her of its decision to void the policy, however, afforded procedural fairness by giving the insured an opportunity to respond. The insured’s response was that she had limited her disclosure because her financial adviser had advised her that only matters between 2013 to 2018 had to be disclosed. After considering the response, the insurer avoided the insured’s income protection cover.

ASIC claimed that the insurer had breached its duty of utmost good faith in the three ways discussed below.

Not informing the insured of her dispute rights and appeal processes

The insurer provided a letter to the insured confirming its decision to avoid the policy. ASIC alleged the insurer breached its duty because the letter did not inform the insured of her rights and the processes to dispute/appeal the insurer’s decision. ASIC also argued that the insurer’s failure was a breach of the Life Insurance Code of Practice 2019 (Code), and that the obligation under the Code was consistent with the duty of utmost good faith.

The court rejected this argument, finding that the letter did refer to these rights and processes (without going into detail). Although the letter appeared to omit some information due to oversight or administrative error, the court considered that the oversight was innocent, which was relevant to whether a duty had been breached. It was also relevant that the insured’s lawyers likely knew of the insured’s rights of review/appeal.

The court also made it clear that the Code does not create legal rights between insurers and any other persons/entities other than the Financial Services Council. That is, ‘no rights [in the Code] are capable of being conditioned by the duty of utmost good faith’.

Failing to make reasonable enquiries and giving appropriate consideration

The court also rejected ASIC’s submission that the insurer failed in its duty because it did not query the financial adviser (or request the financial adviser’s file) regarding its alleged advice to the insured about only making disclosures between 2013 to 2018. 

The court stated that the insured’s answers were unambiguous about her mental health history and that it was implausible for the financial adviser to have given the advice claimed. The court added that this was not the ‘kind of exceptional case where an inquiry of a third party might be called for’.

Identifying and seeking a response regarding specific concerns as to fraud

Finally, the court rejected ASIC’s submission that the insurer breached its duty because it did not inform the insured that it was concerned that the non-disclosures or misrepresentations were fraudulent, nor did it identify the basis for those concerns.

The court stated that the duty did not require the insurer to expressly identify its concerns about dishonesty. Instead, it was sufficient for the insurer to provide an opportunity for the insured to explain its non-disclosures/misrepresentations. It was also permissible for the insurer to not expressly allege fraud before hearing the insured’s explanation.

Observations

This decision provides reassurance to insurers that the courts will not be easily persuaded the duty of utmost good faith has been breached when adequate procedures are in place.

The court was particularly critical of ASIC for relying on ‘isolated judicial statements, made in relation to fundamentally different factual circumstances’. It is a strong reminder that the duty of utmost good faith must be considered objectively and on the facts of each case.

In this case, the processes adopted by the insurer were appropriate, including the procedural fairness afforded to the insured before ultimately making a decision.

The court also provided welcome guidance on the nature of industry codes and their relationship with the duty of utmost good faith. The relationship between the duty of utmost good faith and claims handling obligations to act ‘efficiently, honestly and fairly’[1] is still of paramount importance.

Conclusion

In 2024, ASIC will continue its enforcement priorities, with one focus being insurance claims handling. We therefore expect to see further action taken by ASIC, and if so, hope for further helpful guidance from the courts on insurers’ obligations in managing and responding to claims.

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Mark Brookes

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Partner

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mbrookes@carternewell.com

Michael Webster

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mwebster@carternewell.com