This seemingly simple Latin expression is both subjective and objective. It evokes notions of honesty, conscience, trust, fairness, cooperation and equality, yet it eludes a precise definition. So what is it precisely and what role does it play in the Insurance Contacts Act 1984 (Cth) (“the Act”) and in Australian law and business generally?
It is widely accepted that the concept of ‘utmost good faith’ in relation to contracts of insurance harks backCarter v Boehm wherein a mutual pre-contractual duty of disclosure was held to exist and apply equally to the insured and insurer. Subsequent decisions such as Boulton v Holder Brothers confirmed that the duty of good faith continues for as long as the parties remain in a contractual relationship. The duty was said to exist primarily due to the very nature of insurance. As Lord Mansfield stated in Carter v Boehm:
“Insurance is a contract based on speculation. The special facts, upon which the contingent chance is to be computed, lies most commonly in the knowledge of the insured only.”
The common law recognises that the duty falls on both the insurer and insured: Banque Financiere de la cite S.A. v Westgate Insurance Co Ltd.
The development of the duty of utmost good faith was examined by the NSW Supreme Court in GIO Insurance Ltd v Leighton Contractors Pty Ltd.
Section 13 of the Act requires each party to the contract:
“to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.”
The Insurance Contracts Amendment Act 2013 (Amendment Act) reformed the duty of utmost good faith for contracts entered into or renewed after 28 June 2013. Of importance:
- The duty now extends to third party beneficiaries: s13(3) as defined in s11(1);
- A failure to comply with the duty is now a breach of the Act: s13(2); and
- ASIC may intervene and exercise its considerable powers where an insurer fails to comply with the duty in the handling and settlement of a claim (or potential claim).
WHAT DOES UTMOST GOOD FAITH ACTUALLY MEAN?
There is no singular and complete definition of utmost good faith. The principles of equity provide a broad framework as they are directed towards fairness in contractual dealings between parties. The everyday meanings of the words assist in honing the definition. The Macquarie Dictionary provides the following:
Utmost: (1) (adjective) of the greatest or highest degree; (2) (noun) the greatest degree or amount; (3) the highest, greatest, or best of one’s power; (4) the extreme limit or extent.
Good faith: (noun) (1) honesty of purpose or sincerity of declaration: to act in good faith; (2) expectations of such qualities in others: to take a job in good faith.
In Secured Income Real Estate (Australia) Ltd v St Martins Investment Pty Ltd the Court held that both parties had an obligation to do all that was necessary to “secure the success of the contract” and that by this spirit of cooperation the parties were demonstrating “good faith”.
In Renard Constructions v Minister for Public Works the Court held that even if one party to a contract was exercising a power under a clause in the contract, the invoking of the power may be deemed “unfair” and “unreasonable” depending on the circumstances. Priestly JA said that the duty of “reasonableness had much in common” with the duty of good faith.
In Lockwood v Insurance Australia (trading as SGIC Insurance) the Court was critical of the way the policy wording was constructed. The Product Disclosure Statement was divided into 9 sections. There was no mention of the unlicensed driver exclusion in sections 1 to 8 despite section 4 dealing specifically with exclusions and section 7 dealing with grounds for cancellation. The only reference was in section 9 dealing with claims. His Honour said at paragraph 28:
“The ambiguity with the policy in this case is not found in the words of a single clause but in the juxtaposition of that clause with the balance of the policy.”
The criticisms of the PDS in Lockwood suggest that an insurer can display good faith by clearly identifying, in appropriate places, the inclusion and exclusions under the policy.
Finally, in the High Court Decision CGU Insurance Ltd v AMP Financial Planning Pty Ltd, Justice Gleeson CJ and Justice Crennan J accepted that utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the legitimate interests of an insured, as well as to the insurers’ own interests.
The contra proferentum rule says much about the law’s view of ambiguity that might otherwise favour an insurer. The utmost good faith solution is to be clear in the first place. The benefit of plain wording has been recognised since Roman times: “Quoties in verbis nulla est ambiguitas, ibi nulla exposition contra verba fienda est” – when the language of a written instrument is perfectly plain, no construction will be made to contradict the language.
The final word should go to the General Insurance Code of Practice, which provides at 7.2
“We will conduct claims handling in an honest, fair, transparent and timely manner.”