The duty of good faith owed to one another by insurers and insured parties is a fundamental feature of the insurance relationship.  The duty has long existed at common law and is now also an implied term in every contract of general insurance thanks to the operation of section 13 of the Insurance Contracts Act 1984 (Cth).  An insurer’s duties of good faith arise most commonly in the claims context.  However, it is not always clear what amounts to good faith and what precisely insurers are required to do in order to comply with the duty.  The recent case of Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1385, provides some comment about what the duty requires of an insurer when considering a claim. 

The case concerned a policy which was intended to provide cover in respect of total and permanent disablement.  The insured, Ms Ziogos, lodged a claim with MetLife (the insurer) claiming that she suffered from total and permanent disablement as a result of post-traumatic stress disorder, anxiety and depression consequent upon her work as a police officer in New South Wales.  In order to be entitled to a benefit under the policy, Ms Ziogos was required to provide proof to MetLife’s satisfaction that she had become totally and permanently disabled.

The insured provided evidence of her condition from a number of health professionals, including Dr Smith.  Dr Smith’s evidence was that the insured would never be able to be employed in any form of paid occupation due to her condition.  MetLife arranged for the insured to be examined by a number of health professionals.  One of those professionals concluded that the insured was totally and permanently disabled from returning to work in her normal occupation, but not for other occupations if she became engaged in ongoing psychotherapy. 

Following its investigations, MetLife advised the insured that it held sufficient information to enable it to make a decision.  MetLife provided details of the information it had obtained and gave the insured an opportunity to provide further submissions and evidence relevant to the claim.  Following receipt of further information from the insured, MetLife advised the insured that the claim had been declined.  In declining the claim, MetLife explained that it had relied on the opinions of the health professionals it had retained, some surveillance of the insured and the insured’s relatively young age.

The insured commenced proceedings against MetLife.  At trial, she contended, inter alia, that MetLife breached its duty of utmost good faith by:

  • Unreasonably relying on the opinions of its own health professionals over the opinions of Dr Smith; and
  • Basing its decision on the erroneous belief that the insured was capable of working part-time.

In considering the insured’s allegations, Ball J of the New South Wales Supreme Court examined the scope of the duty of good faith owed by MetLife.  He made the following useful observations about that duty:

  • The duty of good faith does not impose obligations in the abstract.  Rather, it imposes an obligation on the insurer to exercise its rights and discharge its obligations under the policy with the utmost good faith.  In the context of this case, the duty required MetLife to act with the utmost good faith in determining whether the insured had provided proof to its satisfaction of her total and permanent disablement;
  • Where a right to indemnity depends on the formation of an opinion by the insurer, notwithstanding the duty of good faith, there is an implied contractual requirement that the opinion be reasonable.  However, the duty of utmost good faith is broader than the contractually implied term, in that it applies to all aspects of the claims handling process.  In those circumstances, the duty of good faith also required MetLife to:
    • Consider the insured’s claim within a reasonable time;
    • Give the insured a reasonable opportunity to put forward material in support of her claim;
    • Give the insured a reasonable opportunity to comment on material that MetLife had obtained that was adverse to the insured’s claim; and
    • Give reasons for its indemnity decision.
  • The duty of good faith is not simply to be equated to the implied contractual obligation to act reasonably.  Acting reasonably is not the same as acting in good faith.  However, if an insurer forms an opinion and acts reasonably in doing so, it is difficult to see how the insurer breached its duty of utmost good faith.   

The court found that MetLife had complied with the above aspects of its duty of good faith.  However, ultimately, the court held that MetLife was in breach of its contractual obligations to the insured because it could not reasonably have reached the conclusions it did on the evidence available to it.  In coming to this conclusion, the court did not specifically find that MetLife had breached its duty of good faith.

The court’s decision provides some practical guidance about what the duty of good faith requires of insurers in the claims context.  However, like the High Court in CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36, Ball J stops short of explaining how the standard required to meet a duty of good faith differs from the standard required to satisfy an ordinary contractual requirement to act reasonably.