Written by Matthew Freeman
Each year the Australian Securities and Investments Commission (“ASIC”) identifies and publishes a list of ‘enforcement priorities’, being areas where it will be prioritising its detection, investigative and prosecutorial efforts for the forthcoming year. For 2025, one of ASIC’s ‘enforcement priorities’ is failures by insurers to deal fairly and in good faith with their customers.
Insurers owe a duty of utmost good faith to their customers. This duty is a fundamental principle in insurance law, and is codified in section 13 of the Insurance Contracts Act 1984 (Cth) (“the ICA”) which provides:
“A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith“.
The duty of utmost good faith applies to all stages and aspects of the insurance contract, and may prevent an insurer from otherwise being able to rely on provisions in a contract of insurance if to do so would be in breach of the duty (see section 14 of the ICA).
Chief Justice Gleeson and Justice Crennan of the High Court, in CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; 235 CLR 1, commented:
“… utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests. …
… an insurer’s statutory obligation to act with utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. Such an obligation may well affect the conduct of an insurer in making a timely response to a claim for indemnity“.
In Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 [2022] HCA 38 the High Court emphasised that the duty of utmost good faith must be performed consistently with commercial standards of decency and fairness.
Ensuring compliance with the duty of utmost good faith should be a focus for all insurers, and ASIC’s spotlight on insurers not dealing fairly or in good faith with their customers highlights that importance.
Complying with the duty of utmost good faith can be easy, but it can also be easy to get wrong. Innocent actions, misunderstandings or miscommunications can see an insurer fall short of its obligations, and put it in the firing line for investigation and/or sanction; and the failure of an insurer to comply with the duty has potentially many and varied consequences, including adverse findings in a court proceeding, awards for non-financial loss from the Australian Financial Complaints Authority (“AFCA”), and penalties and sanctions from ASIC, not to mention reputational damage. Extreme situations may see suspension or cancellation of an insurer’s financial services licence (although we expect such action would be reserved for the most serious, and repetitive, breaches by an insurer).
Given ASIC’s increased focus on failures by insurers to deal fairly and in good faith with their customers, it is an appropriate time for insurers to remind their staff, and contractors, of what the duty of utmost good faith is, the obligations pursuant to the duty, and steps to take to ensure compliance with the duty (and also importantly, what steps to take if there is a suspected, or actual, breach of the duty).
Should you wish to discuss any of the above, please contact Isabelle Scipione on 03 9947 4565 or any member of the Ligeti Partners team on 03 9947 4500.
