THE DUTY OF UTMOST Increasingly Courts are implying a requires an 'essential element of

GOOD FAITH common law duty of good faith into honesty'll and 'good faith', arguably
commercial contracts. Requiring the inclusion of the word 'utmost'
Kelly Godfrey parties to act honestly and elevates the duty to a higher
Employment Lawyers reasonably in exercising their status,12 requiring the parties to act
contractual rights, absent of fairly and reasonably in accordance
capricious or unconscionable with community standards of
behaviour. 1Whilst the nature of the decency and fair dealing. 13 It may
duty of utmost good faith implied by also require candour,14 utmost
s.13 of the Insurance Contracts Act fidelity, 15 the absence of
7984 (Cth) ('the ICA') is different in recklessness 16 and perhaps at its
nature to that imposed by the highest, sacrificing a discretionary
common law, it too is receiving economic advantage in
renewed interest. 2The doctrine of circumstances where its misuse will
utmost good faith in comparison be detrimental to the other party.17
with other provisions of the ICA It is not however, a fiduciary duty,
remains somewhat of a mystery. requiring one party to place the
Whilst it is an area of insurance law needs of the other above its own. 18
which has remained relatively A party to an insurance contract will
underutilised, the doctrine's be prevented from relying upon any
potential use makes it the great provision in the contract where to
unknown of modern insurance law. 3 do so would constitute a breach of
utmost good faith. 19
The Scope of the Duty of
Utmost Good Faith An objective test, applied to the
It is imperative that both the insurer subjective facts of the particular
and insured participate in all case, is used to ascertain whether
contractual negotiations,4 as the the duty of utmost good faith has
duty of utmost good faith is a been breached. That is, would a
reciprocal duty which relates to reasonable person with the
every aspect of the parties subjective knowledge of the insurer
relationship.5 The duty endures until (orthe insured as the case may be)
take such action?20
all obligations underthe contract of
insurance have been discharged. Breach of the Duty of
However, if the contract is
Utmost Good Faith by the
terminated by a release, the
subsequent behaviour of the parties
Insurer
Whilst not an exhaustive list and
may be relevant. 6 lf a further
obviously based on the particular
legitimate loss was discovered after
factual circumstances pertaining to
execution of the release, the duty of
the case at hand, the duty of utmost
utmost good faith would prevent the
good faith has been found to have
release being pleaded as a bar to
been breached where the insurer
the claim. 7 ln Australia, if litigation
has:
is commenced in relation to the
policy, the duty continues until • failed to explain the important
judgement and perhaps beyond. 8 provisions of the policy to the
insured;21
Defining the Duty of Utmost
Good Faith • failed to notify the insured of the
The duty of utmost good faith, serious consequences of breaching
(alternatively known as the duty of a condition of the policy;22
uberrima fides 9) is better described • failed to inform the insured of any
than defined. With the ICA providing conditions which are precedent to
no definition, guidance must be the insurer's liability to pay the
derived from an examination of the claim;23
parties' relationship on a case by
case basis. 10 Wh ilst the duty

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 19

The duty requires the insurer • failed to observe the strict terms • failed to consult with the insured
in certain circumstances to of the insurance contract;24 in settling the claim and to explain
the consequences of the
discLose materiaL which may • relied on a term which had been
settlement.
be adverse to their case , as included in the policy in error;25
Whilst there is a 'quality of
weLL as provide the insured • failed to advise the insured that
confidence' between the parties
with the opportunity to the policy they had obtained did not
there is no disparity in the parties'
address any matters upon afford the protection they had
bargaining power 35
explicitly req uested ;26
which the insurer has reLied
• declined the claim without
in making their • failed to progress a claim and to
credible and genuine reasons.
make a decision on liabilitywithin a
determination.
reasonable period of time;27 Mere suspicion is not sufficient to
reject the claim. Nor is the insured
• failed to provide an adequate
permitted to unmeritoriouslytest
explanation for denying the claim
the claim by putting the insured to
within a reasonable period of
proof. 36
time;28
A breach of the duty may arise
• failed to make a settlement
where the insurer:
payment on a legitimate claim
within a reasonable time;29 • fails to notify the insured of an
entitlement they have under a
• failed to investigate a claim prior
policy of which the insured lacks
to denying it;30
knowledge;37
• failed to act reasonably and to
• engages in 'horse trading',
carefully assess the interests of
something which is prevalent in
both the insured and insurerwhen
claims negotiations;38
making the decision to defend
rather than settle the claim ;31 • fails to draft the policy of
insurance in clear and
• failed to consult with and to make
unambiguous language, so that the
proper disclosu re to the insu red
insured clearly understands the
where there was a conflict of
policy;39
interest between the parties;32
• fails to disclose to the insured
• failed to be candid and failed to
pertinent information which would
make clearto the insured at an
have a substantive effect upon the
early stage the limits of any
insured's decision to insure against
obligations arising under the policy.
the risk;40
The insurer also failed to advise the
insured of differential liability, as • without a valid reason, offers the
well as the risks the insured faced insured uncommercial conditions
and forwhich they may require on the renewal of a policy
independent legal advice;33 attempting to dissuade the holder
to discontinue coverage;41
• failed to act properly and
reasonably in assessing claims. • delays payment of a claim to
secure an investment benefit;42
This obligation becomes more
onerous in circumstances where • makes an unreasonable and
the insurer is making a unnecessary request for
determination in its own interests. information. 43
The duty requires the insurer in The Courts have held that the duty
certain circumstances to disclose has not been breached, in the
material which may be adverse to factual circumstances of the
their case, as well as provide the particular case, where the insurer:
insured with the opportunityto
address any matters upon which • accepted an increased premium
the insurer has relied in making with the knowledge that an
their determination. 34 exclusion clause in the policywas

20 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

likely to apply, in circumstances 9. exercise care when providing a
where it had explained the legal defence;
exclusion and given the insured the
10. use due skill and care when
chance to overcome it;44
adjusting claims. 50
• unreasonably refused to follow a
The duty of utmost good faith may
certain course of action;45
restrain an insurer's ability to rely
• maintained a bona fide defence on information obtained by its
which ultimately failed ;46 agents, where those agents:
• cancelled the insurance policy on • prior to an indemnity being
the basis of fraud after it had paid obtained, gather information
the claim. 47 without first warning the insured
A breach will not necessarily be that they are conducting
found where the insurer refuses to investigations without prejudice to
accept an attractive settlement the insurer's rights; or
offer in an attempt to avoid adverse • without informing the insured that
publicity or to attempt to have the such information may be relied
insured share the liability.48 upon by the insurer in assessing the
To a large extent these decisions claim. 51
replicate the 'Ten Commandments Breach of the Duty of
of Good Faith' which insurers in a
Utmost Good Faith by the
number of States in the United
Insured
States of America are required to
Again, whilst not a definitive guide
observe. Many States in the United
and obviously based on the
States have enshrined these duties
particular factual circumstances
in statute. 49 These Commandments
pertaining to the case at hand, the
require insurers to:
duty of utmost good faith has been
1. judiciously investigate claims; held to have been breached where
2. efficiently evaluate claims; the insured:

3. inform the insured of all • deliberately provided a false

settlement negotiations; answer in a claims form;52

4. notify the insured of the likely • in the case of a legal indemnity

outcome of litigation; policy, failed to advise the insurer
that proceedings had been initiated
5. forewarn the insured of the against it and hence failed to
possibility of a decision exceeding
provide the insurerwith the
the policy and counsel the insured
opportunity to assume conduct of
in relation to any action they could the matter;53
take to avoid that occurrence;
• intentionally withheld information
6. conduct themselves having in making a claim, intending to
regard to the interests of the deceive the insurer;54
insured;
• failed to act reasonably so as to
7. reasonably consider any reduce or minimise the insurer's
equitable offer of settlement and to liability;55
accept that offerwhere it would be
reasonably prudent to do so, given • failed to provide information
the possibility of paying the total required by the insured and
indemnity; required by the terms of the
policy;56
8. furnish a legitimate defence and
to appeal any adverse decision • knowingly made a fraudulent
where good faith requires such claim. 57
action be taken;

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 21

 Other circumstances in which a to a claim, due to the likely effect
breach of the duty may be found on future premiums;70
include:
• failed to notify the insurer of
• failure to notify the insurer of information which was discovered
circumstances which may effect the only after the claim had been
insurer's future conduct with settled and the contract terminated,
respect to the policy,58 in in circumstances where there was
circumstances where there is an no continuing obligation to do SO;71
enduring contractual obligation to
• had increased the potential
do SO;59
liability of the insurer, by acting in
• recklessly completing a claims accordance with legal advice and
form ;60 electing to rescind an earlier
settlement agreement and enter
• an exaggeration of the
into a new one which provided for
circumstances pertaining to a
the assignment of the insurance
claim;61
contract for an additional year;72
• engaging in 'horse trading' to
• made an innocent error in
settle a cla im ;62
completing a claim form;73
• failure to provide information to
• used the formula provided in the
enable the insurer to make a
policy to calculate the amount
decision on indemnity.63
payable, in circumstances where
It is unlikely that a breach of the the method produced an inane
duty will be found where the resu It. 74
insured:
Insurance brokers do not
• fails to disclose their precarious themselves owe the insurer a duty
fin an cia l posit ion;64 of utmost good faith. However, as
the insured's agent, they must be
• provides information which does
not fully disclose all necessary extremely careful not to breach the
insu red's duty by thei r actions. 75
issues, in circumstances where the
insurer neglects to request REMEDIES FOR BREACH OF
additional material. 65 THE DUTY OF UTMOST
Courts have held that the duty has GOOD FAITH
not been breached on the specific Bad Faith Claims and
factual circumstances of the case,
Punitive Damages
where the insured:
Bad faith claims are prevalent in
• in accordance with legal advice, the United States. It is based on the
withheld information in an effort to premise that insurance is obtained
secu re assista nce from the for peace of mind, which has seen a
reinsured's underwriting agent;66 flurry of litigation and an expansion
of the concept beyond Australian
• failed to disclose that they had
double insurance;67 standards. 76 This covenant of good
faith and fair dealing obliges the
• failed to declare property covered parties to avoid any action which
by the policy in a declaration of may harm the rights of the other to
value clause;68 secure the benefits of the
• made a bona fide claim and contractual bargain. 77 ln the United
instituted court proceedings when States, a breach of the duty may
the claim was denied by the give rise to both contractual and
insurer;69 tortious liability, resulting in not
only compensatory and punitive
• elected in accordance with legal
damages but also damages for hurt
advice, not to notify the insurer of
feelings and emotional distress. 78
circumstances which may give rise

22 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

Whilst some US courts have unreasonably declines to settle a
indicated that there should be a matterwithin the limits of the
reasonable relationship between policy, resulting in a determination
the award of punitive and exceeding policy limits, ordinary
compensatory damages, there are contractual principles should
no prescribed limits. In determining permit a compensable award of
the quantum of the award some US damages, which may exceed policy
cou rts have gone to the extreme of limits. 86 It is possible that punitive
allowing evidence of the insurer's damages may also be imposed
financial position to be tendered. where an insurer demonstrates a
The State of California has callous disregard forthe interests
consistently made the highest of the insured or systemically
awards, with punitive damages breaches the policy. Whilst s.13 is
sometimes 200 times the likely to play an ancillary role in
compensatory damages award. such circumstances, (the action
Some US courts have also likely to involve a breach of other
indicated a willingness to award terms and conditions of the policy),
punitive damages in cases where the very existence of the duty of
compensatory awards are denied.79 utmost good faith may increase the
likelihood of such an award. 8?
The evolution of bad faith damages
in New Zealand has been short In Gibson v The Parkes District
lived with the New Zealand Court of Hospita{88 Badgery-Parker J
Appeal overturning the High Court's examined the duty of good faith in
decision to award bad faith the context of a workers
damages in Cedenco Foods Ltdv compensation policy, not subject to
State Insurance Ltd. 8o The High the ICA. However, His Honour's
Court in making the award indicated reasoning could equally be applied
that whilst the payment of interest in the context of claims arising
went some way toward providing under the ICA. His Honour held that
appropriate compensation, the the insurer had breached its duty of
'outrageous' failure of the insurer to good faith in failing to process and
promptly pay the valid claim pay the claim within a reasonable
justified sanction byway of punitive period of time and that this breach
damages, intended to punish the attracted liability for damages in
insurer. 81 tort, given the proximate
relationship between the parties,
Whilst the Australian Law Reform
characterised by 'dependence and
Commission ('theALRC') has
vulnerability' .89 His Honour
declined to introduce a tort of bad
indicated that the damage suffered
faith into the ICA, asserting that
by the insured went well beyond
contractual remedies are
that which the workers
sufficient,82 the courts have at least,
compensation scheme could
in circumstances where the
remedy. He indicated that the
insurance contract is not subject to
insurer's conduct had the potential
the ICA, indicated the potential for
to cause not only 'temporary
the existence of a tortious duty.83
hardship, anxiety and distress, but
Whilst awards of punitive or
also in some cases ongoing
exemplary damages are rare, often
economic loss; as where during the
confined to intentional torts such as
period of delay the worker is unable
defamation and trespass,84 it
to maintain mortgage or hire
appears that Australian courts are
purchase payments and suffers
becoming less conservative in their
forfeiture or is forced to sell
approach. 85
assets' .90 For this the worker must
Theoretically damages exceeding receive adequate compensation.
the limits of the insurance policy
are possible. If an insurer

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 23

 Whilst both Cooper J in Dorrough v insured treats the insurer's breach
Bank of Melbourne Ltd 91 and of a term of the contract (or breach
McDonald J in Gimson v Victorian of s.13) as a repudiation and
Workcover Authority 92 have terminates the contract or elects to
expressed their doubts in relation to keep the contract on foot. In the
Badgery-Parker J's decision in later case, the insured's recovery
Gibson, there appears no reason would be limited to the contractual
why in an appropriate case, the indemnity specified in the policy,
same arguments will not be however, in the formerthe insured
applied. could arguably recover beyond the
limits of the policy.
For instance, in Stuart v Guardian
Royal Exchange Assurance of New In this respect the abilityto claim
Zealand Ltd [No 2}93 the New damages in an insurance context
Zealand High Court awarded may differ with respect to the
additional damages in the form of: position which exists at common
law. The common law permits a
• interest on mortgage
party, in circumstances of a breach,
repayments, which but for the
to either keep the contract on foot
insurer's failure to indemnify would
and sue for damages in relation to
have been discharged;
the breach of that provision or
• expenses associated with a accept the repudiation, terminate
propertywhich the insured was the contract and sue for damages. 99
unable to use; and However, the English and New
Zealand cases of Grant v
• alternative accommodation
Cooperative Insurance Society 100
costs. 94
and Stuart,101 adverted to by Hirst J
However, the court rejected a claim in Ventouris v Mountain {'The Italia
for maintenance and security Express'} No.2, 102 suggest that
expenses since these were costs there might also be an entitlement
the insured would have been to damages over and above the
required to incur regardless of the policy limits, in circumstances
insurer's breach. 95 where there was not a repudiation,
Whilst damages for hurt feelings, on the basis that it was
disappointment, frustration and contemplated by the parties that
anxiety are not, as a general rule, the obligations under the contract
awarded in a breach of contract would be carried out a certain way
case, the New Zealand High Court and theywere not. Clearly the
has deemed appropriate, as part of matter remains open for
the general damages component to speculation and future clarification
make an award for distress and is awaited with interest.
inconvenience, in circumstances In 'The Italia Express'103 Justice
where it can be shown that such Hirst indicated that damages for
was a reasonably foreseeable hardship, inconvenience and
consequence of the insurer's mental distress may be recovered
breach. 96 If the comments of in circumstances where the
Badgery-Parker J in Gibson and purpose of the contract of insurance
Bollen J in Moss are any indication, was to provide 'peace of mind or
this may be the direction in which freedom from distress'.
the Australian courts are heading. Acknowledging that a marine
The courts in Kassem v Colonial insurance contract was unlikely to
Mutual 97 and CIC Insurance Ltd v be of this ilk given the insured was
Bankstown Football Club 98 discuss normally a company, he left open
the ability of the insured to recover the possibility that an individual
beyond the terms of the contract. may be able to invoke the 'peace of
This is dependent on whetherthe mind' test, thereby securing such
damages. 104

24 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

The English Court of Appeal in of the claim was unreasonably
Sprung v Royal Insurance Company withheld, to the date the payment is
(UK) Ltd,105 indicated that in an made or posted, whichever is
appropriate case they may be earliest. 112 The interest rate is
persuaded to award damages contained in Regulation 32 of the
exceeding the contractual Insurance Contracts Regulations. It
indemnity obligation. This may is calculated on the basis of the
necessitate the English Courts prevailing interest on Treasury
categorising the duty to indemnify Bonds plus three per cent. The rate
for loss as one which is implied in of interest can be adjusted in
the insurance contract, in accordance with market rates
preference to the duty of utmost where the rate specified in
good faith, thereby limiting the Regulation 32 is deemed
insured's remedy to rescission of inappropriate. 113
the policy.106
Traditionally, courts in relation to a
In Johnson vAustralian Casualty Co breach of the duty of utmost good
Ltd,107 a case involving an income faith or for that matter any other
protection disability policy, the fundamental term of the insurance
Supreme Court of Victoria held, contract, have been extremely
given the nature and purpose of the reluctant to sanction any award
policy, that it was a foreseeable which would exceed the
consequence of the insurer's delay indemnified amount plus interest
that the insured would suffer pursuant to s.57. However, a
mental distress, physical question has now arisen as to
inconvenience and exacerbation of whether s.57 permits recovery of
their illness. The Court therefore Hungerfordsdamages l14 in addition
awarded $20,000 in damages, as to the payment of interest, thereby
well as an order for specific potentially further expanding the
performance. 108 Similarly, the New range of remedies available where
South Wales Court of Appeal in s.13 is breached.
MAM Insurance Pty Ltd v Kelly 109
In Moss v Sun Alliance Australia Ltd
awarded damages for emotional
115 Bollen J indicated that s.57 of the
distress in respect to non-payment
ICA should not be regarded as a
pursuant to a motorvehicle policy
code for the recovery of payments
of insurance. The Court indicated
which have been withheld under a
that the award could be made
policy of insurance. His Honour
without supporting medical
indicated that s.57 did not state that
evidence. 110
only interest and no damages were
Peterson argues that the recoverable. 116 Bollen J in awarding
development of a general tortious the insured an additional amount to
duty, recognising the inherent compensate forthe extra interest
requirements of utmost good faith which had accrued as a result of the
and applied with sufficient flexibility, insurer's delay indicated that this
could provide a unifying standard of was a 'compensable consequence'
good faith with appropriate which the insurer should have
remedial elasticity.lll reasonably foreseen would arise as
a result of their actions. Whilst
Interest and Hungerfords
refusing the insured's claim of an
Damages additional $500,000.00 for
A breach of the duty of utmost good exemplary damages in the
faith has the potential to make a
circumstances which arose in this
wide range of remedies available, case, his Honour indicated that such
including the payment of interest.
an award may be possible in
Section 57 of the ICA requires an circumstances of reprehensible
insurerto pay interest from the date co nduct.117
on which it is deemed that payment

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 25

Whilst there appears no Whilst Bollen J's decision in Moss, Whilst it appears the utilisation of
reason why, in an that s.57 does not prevent s.57 and payment of Hungerford
Hungerfordsdamages consisting of damages currently remains a
appropriate case, that a
compound interest, has received a remedial option available in breach
court will not grant great deal of support,118 the matter of s.13 cases further clarification of
declaratory or injunctive is far from settled. Opponents find the position is required.
relief, this is still a relatively solace in:
Declaratory or Injunctive
untested domain. In • comments by Mason CJ and Relief
circumstances where an Wilson J in Hungerfordscase that Whilst there appears no reason
insurer is unreasonably s.30C of the Supreme Court Act why, in an appropriate case, that a
delaying determination of the 7935(SA) was 'not intended to erect court will not grant declaratory or
a comprehensive and exclusive
claim, it may be possible for injunctive relief, this is still a
code governing the award of relatively untested domain. In
an insured to request an
interest' ; circumstances where an insurer is
order requiring a decision be
• the obiter contentions of McHugh unreasonably delaying
made. determination of the claim, it may
JA in NRMA Insurance Ltd v Tatt 119
that s.57 'completely, exhaustively be possible for an insured to
and conclusively [states] the law on request an order requiring a
the subject of interest payable for decision be made. Admittedly, in
periods during which a person has these circumstances s.41 of the leA
been kept out of insurance moneys may provide the insured with a
to which he is entitled'; and more effective remedy. However,
the possibility for the utilisation of
• the addition of sections 57(4) and
s.13 should not be overlooked or
(5) by the Insurance Laws
underestimated in light of recent
AmendmentAct 7998;
judicialopinion. 123
to argue for its preclusion and to
In GIG Insurance Ltd v Leighton
support the codification of s.57. 120
Contractors Pty Ltd 124 and
However, the Full Federal Court Lampson vAhden 125 insurers failed
decision of Elders Ltd v Swinbank in their attempts to use s.13 to
121 suggests that the matter entirely compel the insureds to disclose
depends on the basis upon which certain information. However, those
damages are claimed. If failures can be confined to the facts
Hungerfords damages are claimed at hand. There appears no logical
'on a basis different from the reason why in an appropriate case
opportunity or borrowing costs an insurer or an insured could not
measured by appropriate utilise s.13 to force disclosure
commercial rates there is no where such constitutes a breach of
reason to read s.57(5) as limiting a the duty. 126
claimant to recovery of interest
under s.57[l) as the only
THE DUTY OF UTMOST
compensation for those losses'. The GOOD FAITH AND OTHER
court indicated that Mason CJ and leA PROVISIONS
Wilson J's reference in Hungerfords Duty of Utmost Good Faith
case to the 'rule of law' referred to and the Duty Of Disclosure
principles of common law and
(ss.13and21l
hence:
Whilst it appears that the duty of
Section 57(5) should be confined to disclosure imposed by s.21 of the
preventing the award, by way of ICAwas intended to create an
compensation for being kept out of exception to the paramount duty of
moneys payable under a contract of utmost good faith,127 obiter
insurance, of interest under any comments by Ormiston JA in CIC
State legislation or interest as Insurance Ltd v Barwon Region
damages under any rule of the Water Authority 128 has left open the
common laworequity.122 possibility that in certain

26 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

circumstances the duties may Duty of Utmost Good Faith
co-exist, providing an alternative
and the Insurers Inability to
remedy.129 Logically this
refuse to Pay Claims in
contingency should only be possible
in a claims context and not in Certain Circumstances
relation to the making of or renewal (ss.13 and 54)
of a contract of insurance. This Whilst it appears that Parliament
would impose a greater burden on intended that the remedies outlined
the insured, than a mere non- in s.54 of the ICAwould be available
disclosure claim unders.21, by in the case of a breach of the duty of
enabling the insurer to deny liability utmost good faith, its application is
ratherthan simply charge an problematic. 136 According to Sutton,
additional premium. in circumstances where a breach of
s.13 is not enough to enable the
It is extremely doubtful that this
insurer to deny either the whole or
was the intention of the legislature
part of the claim, then the insured
and certainly the proposition does
may not be able to utilise s.54. 137 Of
not appear to compliment the
course, unless the insurer can
apparent purpose of s.12. 130
otherwise legally decline to
Nevertheless, Barwon leaves open,
indemnify the insured, they must
by obiter dicta, the possibility, in a
pay the entire claim and thereafter
suitable case, forthe utilisation of
counter-sue the insured for breach
the duty of utmost good faith in a
of s.13. 138
situation which involves the duty of
disclosure. According to Ipps J in Entwells v
National & General 139 and
Duty of Utmost Good Faith others,140 s.54 will not permit an
and Third Parties insurer where there is a breach of
(ss.13 and 48) s.13 to avoid the contract ab initio.
Section 48 of the ICA enables a Section 54(1) will only permit the
third party, who is not a party to the insurerto refuse the claim to the
insurance contract, but who is either extent that the interests of the
identified or referred to as a party insurer have been prejudiced by the
to whom the coverage extends, to breach. 141 However, some would
recover under the policy directly argue that any counter action for
from the insurer. 131 breach of s.13 should be
determined pursuant to the
Whilst both privity of contract and
ordinary contractual rules of
the wording of s.13 would suggest
remoteness and foreseeability, not
that the duty of utmost good faith
prejudice. 142 Furthermore, the issue
was limited to the parties to the
of prejudice may not be as easily
insurance contract, obiter
resolved in some cases as it was in
comments by Hunter J in Wyllie v
Entwells. 143
The National Life ofAustralasia Ltd
132 and others, 133 leave open the According to Tarr, the right to annul
possibility in certain circumstances, the insurance policy for breach of
of an extension of the duty to the duty of utmost good faith is able
include third parties. 134 to be reconciled with s.54(1) on the
Unfortunately, the present case law basis that the annulment works
fails to clarifywhetherthe common prospectively, whereas s.54(1) only
law duty or the statutory duty under attempts to maintain the claim
the ICA applies. Whilst there are where there is no prejudice. 144
significant differences between the However, Yeldham argues that s.13
applicable duties, the extent to operates as an independent
which the common law duty has remedy and may be used to
been influenced by the operation of overcome a situation where a
the ICA also remains an issue for parties rights would otherwise be
judicial determination. 135 limited by ss.54 and 56. Therefore,

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 27

The only explanation Tarr can a great deal of uncertainty where s.56 could be applied, s.54 is
surrounds the relationship between redundant, given s.54 is subject to
provide to reconcile the duty of
ss.13 and 54, (and as we shall see the provisions of s.56 concerning
utmost good faith with s.56 is
ss.13 and 56), which requires fraudulent claims. 152
that the legislature, by further judicial consideration and Whilst the relationship between
allowing the courts to excuse ana lysis. 145 ss.13 and 56 awaits authoritative
~little frauds', are providing an
Duty of Utmost Good Faith determination in the Australian
appropriate degree of flexibility context, the recent House of Lords
and Fraudulent Claims
to avoid the imposition of decision of Manifest Shipping Co
(55.13 and 56)
disproportionate penalties, Ltd v Uni-Polaris Shipping Co Ltd 153
It is difficult to reconcile the duty of
ratherthan intending to has seen a watering down of the
utmost good faith with the freedom
post contractual duty of utmost
detract from the duty of utmost given to the courts under s.56 of the
good faith in England. As a result of
good faith itself. However, the ICA to provide equitable relief for
this decision, the insurerwill find it
distinction clearly has no basis 'little frauds'. Whilst s.56 permits
extremely difficult, in the absence
the insurer to refuse to pay a claim
in logic and is adept to of fraud in the claims process, to
which is made fraudulently, it does
describing a lady as only being not enable the insurer to avoid the
successfully argue that the
a ~little pregnant' .It has the insured's conduct constitutes a
contract. The complication arises
breach of the duty of utmost good
same perverse and irrational because the duty of utmost good
faith. 154 The Court indicated that
flaws. faith is said to be paramount and
whilst it was appropriate to require
not constrained by any other law or
an extremely high level of
provision in the ICA,146 yet clearly,
disclosure at the formation stage,
fraud in any context or quantity will
there was no reason to expect the
constitute a breach of s.13. Log ic
same level of disclosure to extend
would therefore dictate that the
beyond this stage. 155 This decision
duty of utmost good faith may be
typifies the increasing trend in
used as an alternative argument in
England to not only severely
circumstances of fraud.
restrict the opportunities for an
Alternatively, where the conduct did
insurerto avoid the policy but to
not satisfy the requirements of s.56
limit the duty of enduring good
it might nevertheless constitute a
faith. 156
breach of ss.13 or 14. Of course,
whether a claim is fraudulent or not THE FUTURE FOR THE
is an entirely subjective matter 147 GREAT UNKNOWN OF
The only explanation Tarr can MODERN INSURANCE LAW
provide to reconcile the duty of Given the aura of consumer
utmost good faith with s.56 is that protectionism which pervades the
the legislature, by allowing the ICA and the legal environment in
courts to excuse 'little frauds', are general, the principles embodied in
providing an appropriate degree of s.13 are ever increasingly capable
flexibility to avoid the imposition of of broader application. Justice
disproportionate penalties, rather demands that the law continues to
than intending to detract from the evolve and develop and novelty of
duty of utmost good faith itself.148 argument will not of itself impede a
However, the distinction clearly has claim. Whilst some of the
no basis in logic and is adept to possibilities have been discussed
describing a lady as only being a above, many await future judicial
'little pregnant'. It has the same consideration, analysis and
perverse and irrational flaws. 149 determination. 157

In\ Tiep Thi To v Australian

A~\sociated Motor Insurers Ltd 150
the, court left open the question of
the\.relationship between the duty of
utmost good faith and s.56,151
however, clearly indicated that

28 AUSTRALIAN CONSTRUCTIO~ LAW NEWSLETTER #87 DECEMBER 2002

REFERENCES 3. Yeldham BA, 'Good Faith and NSW Sup Ct per Giles J; CIC
1. Mansfield LJ in Carter v Boehm Claims Handling' (Paper presented Insurance Ltd v Tancredi (' Tancredi
(1776) 3 Burr 1905; 97 ER 1162; at the BLEC Seminar: Insurance ') (1996) 9 ANZ Ins Cas 61-302 per
[1558] All ER Rep 183 is credited Litigation and Complex Claims Nathan J. Mann, Note 2 at
with having first introduced the duty Management, Syd ney, May 1991) [13.10.5]; Moran, Note 5 at 11 ;
into the English common law. For 49,76; Bremen J, 'Good Faith and Gray, Note 1 at 14.
more recent examples where the Insurance Contracts-Obligations
7. Gill M and Radford M, 'Utmost
duty has been implied see Renard on Insurers' (1999) 19 Australian
Good Faith-The Coming of
Constructions (ME) Pty Ltd v Bar Review89, 90-91,93; Gill M
Age'(1994) 10(1) Australian
Minister for Public Works (1992) 26 and Radford M, 'Utmost Good Faith:
Insurance Law Bulletin 1, 3.
NSWLR 234; Hughes Bros Pty Ltd v Section 13 and Breach of Contract'
Trustees of the Roman Catholic (1994) 10(2) Australian Insurance 8. Horbelt v SGIC (unreported) Sup
Church for the Archdiocese of Law Bulletin 17, 19. Ct of SA, 26 June 1992. Cf. The
Sydney and anor(1993) 31 NSWLR English decision of 'The Star Sea'
4. Cameron MacIntosh Pty Ltd v C
91; Hughes Aircraft Systems Note 5 which held that once
E Heath Underwriting & Insurance
International vAirservices Australia litigation commences the duty of
(A us t} Pty Ltd(unreported) Vic Sup
(1997) 146 ALR 1 per Finn J at 36- utmost good fa ith ceases to operate
Ct, Ormiston J, 25 September 1991.
47; Burger King Corporation v because the parties are now
Mann, Note 2 at [13.30.1]; Masel G,
HungryJack's PtyLtd[2001] opponents and the Rules of Court
Tulloch T and Sharpe A, The Phillips
NSWCA 187; LMI v Baulderstone requiring disclosure dispense with
Fox AnnotatedAustralian Insurance
[2001] NSWSC 886. See generally: the need for the duty of utmost
Law Statutes (Syd ney: Prospect
Mason A, 'Contract and its good faith. It is likely that this would
Media Pty Ltd, 2001) [13.40].
Relationship with Equitable also include arbitrations. Loo R,
Standards and the Doctrine of Good 5. Whilst the duty applies to both 'The Duty of Utmost Good Faith: Is
Faith', The Cambridge Lectures pre and post contract formation, the the Duty Expanding?' (May 2001)
(Paper presented at The Cambridge ambit of the duty pertaining to each Allens Arthur Robinson: Insurance
Lectures, Cambridge, 8 July 1993); may be different. See: the House of 1,2; Smith P, 'Duty of Utmost Good
Peden E, 'I ncorporati ng Terms of Lords decision of Manifest Shipping Faith Clarified' (2001) 9 Fortune
Good Faith in Contract Law in & Co Ltd v Uni-Polaris Insurance Manning: Insurance Brief 1;
Australia' (2001) 23 Sydney Law Co Ltd ['The Star Sea'} [2001] 2 Dingwall S, Hargreaves E and
Review 222; WLR 170 for a further discussion on McGough L, 'Post-contractual Duty
PricewaterhouseCoopers Legal, this in the context of the English of Utmost Good Faith' (2001) Norton
'The Obligation to Act "in Good Marine Insurance Act; Black King Rose: Briefing-Insurance Group 1,
Faith'" (October 2001) Construct 1; Shipping Corp & Wayang (Panama) 3; Pring M, 'The Continuing Duty of
Gray A, 'The Duty of Utmost Good SA v Massie (The 'Litsion Pride '} Utmost Good Faith: Clear (Legal)
Faith' (Paper presented at the IRR 1985 1 Lloyds 437 per Hirst J at Water, at Last?' (1 March 2001)
Conference 2001, 1 May 2001) 1 at 511-512; Australian Law Reform Denton Wilde Sapte Insurance
2-3. Commission, Insurance Contracts, Group 1,4,6; Eggers et al., Note 5
Report No 20 ('ALRC 20') at 12.47.
2. Whilstss.13and 14arguably (Canberra: Australian Government
codify the duty of utmost good faith 9. The literal definition of which is
Publishing Service, 1982) at [328];
forthe purposes of the ICA, the 'of the fu llest confidence'. See
Mann, Note 2 at [13.10.4]; Masel,
common law duty continues to Seaton v Heath, Seaton v Burnand
Note 2 at 101, Gray, Note 1 at 1;
apply to those areas of insurance (1899) 1 OB 782 per Romer LJ at
Moran PJ, 'Duty of Utmost Good
law referred to in s.9 of the ICA. 792. CCH, Australian and New
Faith-Where is it Heading?' (Paper
However, given the preservation of Zealand Insurance Law Reporter
presented at the Australian
the common law by s. 7 of the ICA (Sydney: CCH Australia Limited,
Insurance Law Conference: Update
there are still limited opportunities 2002) [5-630]; Gray, Note 1 at 2.
on General Insurance Issues
forthe operation of the common (Session 5), Perth, 2-4 September 10. Sheldon vSun Alliance Aust Ltd
law duty in relation to ICA contracts. 1998) 1,2,3; Bremen, Note 3 at 90; ('Sheldon') (1989) 53 SASR 97 per
Mann P, Annotated Insurance Eggers PM and Foss P, Good Faith Bollen J at 152: 'The concept of
Contracts Act (Sydney: Law Book and Insurance Contracts (London: "good faith" ... is resistant to precise
Co., 3rd ed, 2001) [12.10.2]; Masel LLP, 1998) 13.03. definition.' Mann, Note 2 at
G, 'The Post-contractual Duty of [13. 10.3] ; Ti lbury M, 'I nsura nce' in
Utmost Good Faith'(1998) 13(8) 6. Trans Pacific Insurance Co
Vermeesch R B and Lindgren KE
Australian Insurance Law Bulletin (Australia) Ltd v Grand Union
(ed), Business Law ofAustralia
101; Gray, Note 1 at 1,5,6. Insurance Co Ltd(' Trans Pacific'),
(Sydney: Butterworths, 10th ed,

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 29

 2001) Chapter 28 at [28.27]; Gray, Scotford T, 'The Insurer's Duty of
Note 1 at 9,10; Bremen, Note 3 at Utmost Good Faith: Implications for
90; Gill M and Radford M, 'Utmost Australian Insurers' (1988) 1(2)
Good Faith-The Coming of Age' Insurance LawJournal 1,2-4.
(1994) 9(10) Australian Insurance 13. Essentially 'a form of
Law Bulletin 81. commercial morality'. Hawke, Note
11. Vermeulen v SIMU Insurance 12 at 142. These obligations are
Association (1987) ('Vermeulen ') 4 also quintessential to the General
ANZ Ins Cas 60-812 per Hardies- Insurance Code of Practice. Sutton
Boys J at 75,987; Kelly v New K, Insurance Law in Australia
Zealand Insurance Co Ltd( 'Kelly') (Sydney: Law Book Co Ltd, 2nd ed,
(1993) 7 ANZ Ins Cas 61-197 at 1991) 101; Lucke HK, 'Good Faith
78,258; affirmed (1996) 9 ANZ Ins and Contractual Performance' in
Cas 61-317 per Owen J at 76,519- PO Finn (ed), Essays on Contract
76,520; CIC Insurance Ltd v Barwon (Sydney: Law Book Company,
Region Water Authority(' Barwon') 1987) 155, 160; Kelly, Note 11 per
(1999) 10 ANZ Ins Cas 61-425. Owen J at 111 ; Barwon, Note 11
However, dishonesty is not perOrmistonJAat699. Mann, Note
necessarily required to constitute a 2 at [13.10.3], Masel, Note 2 at
breach. ACN 007838374 Pty Ltd v 102-103; Tilbury, Note 10 at
Zurich Australia Insurance Ltd [28.27]; Gray, Note 1 at 10; Moran,
('ACN 007 ') (1997) 69 SASR 374 Note 5 at 4.
per Olsson J. Cf. Barwon, obiter 14. Nigel Watts Fashion Agencies
comments by Ormiston JA who PtyLtdvGIG General Ltd( 'Nigel')
thought an element of dishonesty (1995) 8 ANZ Ins Cas 61-235 per
may be necessary. Mann, Note 2 at Kirby P at 75,643. Masel, Note 2 at
[13.10.3]; Masel, Note 2 at 102- 103.
103; Gray, Note 1 at 9; CCH, Note 9
at [5-640]; Masel et al., Note 4 at 15. GIG Insurance Ltd v Leighton
[13.20J. Contractors Pty Ltd( 'Leighton')
(1996) 9 ANZ Ins Cas 61-293.
12. Sheldon, Note 10 per Bollen J Masel, Note 2 at 103.
at 152; Gutteridge v Commonwealth
ofAustralia (' Gutteridge') 16. Barrett v State ofSouth
(unreported) Qld Sup Ct, 25 June Australia (1994) 62 SASR 208; ACN
1993 per Ambrose J at 11 ; re Zurich 007, Note 11. However, an innocent
Australian Insurance Ltd (' re errorwill not be sufficient to result
Zurich') (1999) 10 ANZ Ins Cas 61- in a breach of the duty of utmost
429 per Chesterman J at 74, 839; good faith. See Kinred v State
Hoffmann F, 'Knowing the Rights Insurance General Manager
and Obligations Under the Duty of ('Kinred') (1989) 5 ANZ Ins Cas 60-
Utmost Good Faith' (Paper 923. Masel, Note 2 at 102, 103.
presented at the II R Conferences, 17. Hawke, Note 12 at 96 citing
The 7995 National Insurance Law Professor Burton's reliance on the
and Litigation Congress, Sydney, 29 concept of 'expectation interest'.
March 1995); Mann, Note 2 at Masel, Note 2 at 103.
[13.10.3]; Masel, Note 2 at 102-
103; Tilbury, Note 10 at [28.27]; 18. Loa, Note 8 at 8.
Moran, Note 5 at 4,5,20; Gray, 19. s.14 ICA. Masel, Note 2 at 102;
Note 1at 4,9. Cf. Henchliffe S, Gray, Note 1at 7; Bremen, Note 3
'Insurance Claims: Fraud and the at 90; LBC, Halsbury's Laws of
Duty of Utmost Good Faith' (1997) Australia, Vol22 (at 11 March 2002)
8(3) Insurance Law Journal 21 0; 22 Insurance and Income Security,
Hawke F, 'Utmost Good Faith-What 'Chapter 6 Part B Division 2
Does it Really Mean?' (1994) 6 Subdivision (i) Utmost Good Faith'
Insurance LawJournal 91 ,98; [67J.

30 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

20. Loa, Note 8 at 4. See also the sickness and accident payments. prospects of a successful defence,
House of Lords comments in 'The Masel, Note 2 at 103-104; Mann, but simply because it preferred not
StarSea'Note 5 on this issue. Note 2 at [14.10.3], [14.1 0.6J. to make a settlement payment up
Whilst the case concerned an to the full liability limit. Masel, Note
25. Baradom Contracting Pty Ltd (in
examination of the duty of utmost 2 at 104; Moran, Note 5 at 9-10, 17;
liq) v GIG General Ltd (unreported)
good faith in terms of the Marine Yeldham, Note 3 at 58,60; CCH,
NSW Sup Ct, Allen J, 13 June 1996.
Insurance Act 7906 [UK) their Note 9 at [5-630], [5-640], [23-
Masel, Note 2 at 103; Gray, Note 1
Lordships comments provide 740]; Loa, Note 8 at 6; Eggers et al.,
at 8; Mann, Note 2 at [14.10.7];
assistance in an examination of the Note 5 at 12.45.
Masel et al., Note 4 at [14.30J.
duty in the context of the ICA.
32. ACN 007, Note 11 per Olsson J.
Dingwall et al., Note 8 at 3. 26. Speno Rail Maintenance
The insurer's had deliberately kept
Australia Pty Ltd v Hamersley Iron
21. AAMI Ltd v Ellis [' Ellis') (1990) 6 the insured in the dark by defending
Pty Ltd; Zurich Australian Insurance
ANZ Ins Cas 60-957 per Cox J. the action despite the fact that they
Ltd v Hamersley Iron Pty Ltd [200 1)
Masel et al., Note 4 at [13.50]; Loa, had already made a decision to
11 ANZ Ins Cas 61-485. CCH, Note
Note 8 at 5; Eggers et al., Note 5 at deny the claim. The case can be
9 at [6-025J.
12.15, 12.32, 12.33. distinguished from Reid v Campbell
27. Whilst an insurer can delay a Wallis Moule & Co Pty Ltd [1990]
22. Ellis, Note 21 per Cox J. Cf.
determination in relation to the VR 859 where there was a sufficient
Chesterman J in re Zurich, Note 12
claim pending verification and disclaimer by the insurer and its
at 74,840 who indicated that such a
investigation of the matter they solicitors which enabled them to
finding 'elevated [the] obligation in
must carry out these tasks within a pull out of the case albeit at the last
an insurerto coddle its insured and
timely manner. Distillers Co minute. Masel, Note 2 at 104;
[allowed] idiosyncratic judicial
Biochemicals (Aust) Pty Ltd vAjax Mann, Note 2 at [14.10.9]; Tilbury,
solicitude to replace principle'.
Insurance Co Ltd(1974) 130 CLR 1 Note 10 at [28.28]; Gray, Note 1 at
Masel, Note 2 at 103; Gray, Note 1
[' Distillers') per Stephen J at 31-32; 9.
at 1,8; Moran, Note 5 at 10; Tilbury,
Moss vSun Alliance Aust Ltd
Note 10 at [28.28]; Mann, Note 2 at 33. Nigel. Note 14. Whilst this case
['Moss') (1990) 55SASR 145; 6
[13.40.3], [14.1 0.2J. involves a claim under the Workers
ANZ Ins Cas 60-967; 93 ALR 592;
23. Re Bradley and Essex and Compensation legislation, to which
Gutteridge, Note 12 per Ambrose J
Suffolk Accident Indemnity Society the ICA does not apply, one of the
at 11 ; Mann, Note 2 at [13.40.1],
(1912) 1 KB 415. Moran, Note 5 at claims which were made fell
[13.40.8]; Gray, Note 1 at 8; Masel,
8. outside the policy and hence the
Note 2 at 104; Yeldham, Note 3 at
court examined the common law
24. Banks v NRMA Insurance Ltd 57-59; Moran, Note 5 at 9, 14;
duty of good faith, which whilst
['Banks') [unreported) Sup Ct of Tilbury, Note 10 at [28.28J.
different to that imposed by s.13
NSW, No. 28340/87, Brownie J, 1 28. RAF England vZurich Australian ICA gives a good indication of the
September 1998-the duty of Insurance Ltd[unreportedL District court's attitude to the issue. Masel,
utmost good faith required the Ct of Adelaide, Kitchen J, 30 July Note 2 at 104; Moran, Note 5 at lO-
insurer to pay for the replacement 1991. Masel et al., Note 4 at 11 ; Masel et al., Note 4 at [13.65J.
costs of a building, despite its age [13.90]; Gill et al., Note 7 at 2.
and the fact that it contained many 34. Wyllie v National Mutual Life
29. Moss, Note 27. Cf. reZurich, Association ofAustralasia Ltd
features which were unlikely to be
Note 12 where Chesterman J in ['Wyllie') [unreported) NSW Sup Ct,
reinstated. The message for
obiter claimed that the obligation to Hunter J, 18April1987; Edwards v
insurers is clear, revise standard
pay arose as a result of an implied The Hunter Valley Co-op Dairy Co
form contracts if you do not wish to
contractual term, rather than any Ltd & Anor(1992) 7 ANZ Ins Cas
be compelled to complywith the
duty of utmost good faith. Mann, 61-113; Beverley v Tyndall Life
terms. Ibrahim v Greater Pacific Life
Note 2 at [13.40.1]; Moran, Note 5 Insurance Co Ltd(1999) 10 ANZ Ins
Insurance Co Ltd(1996) 9 ANZ Ins
at 14; Masel et al., Note 4 at Cas 61-453 which required ,the
Cas 61-330 per Brownie J held that
[13.80]. disclosure of medical reports;
it would be a breach of the duty of
utmost good faith for an insurer to 30 Loa, Note 8 at 6. Szusterv Hest Australia Ltd & Anor
deduct from the award social [unreported) District Court of SA,
31 . Distillers, Note 27 at 29, 31. Herriman J, 6 March 2000. Mann,
security benefits, which the insured Stephen J indicated that it would be
had been required to obtain due to Note 2 at [13.40.1]; Masel, Note 2
a breach of the duty of an insurer at 104; Yeldham, Note 3 at 60; CCH,
the insurer's failure to comply with simply to refuse to settle a claim,
its contractual obligations when it Note 9 at [5-640]; Hilditch A,
not because there were reasonable 'Utmost Good Faith-Insurer's
wrongly terminated the insured's

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 31

 Obligation to Disclose Information NZ Ltd(1990) ANZ Ins Cas 61-003.
Relied on in Considering Indemnity' Gill et al., Note 7 at 2.
(April2000) Ward & Partners- 44. Kelly, Note 11 per Owen J at
Insurance Bulletin 4,5; Hilditch A, 76,520. Mann, Note 2 at [13.40.5],
'Insurer's Duty of Utmost Good [14.10.4]; Gray, Note 1 at 8; Masel,
Faith-Does it Require Disclosure of Note 2 at 104; Tilbury, Note 10 at
All Information upon which it has [28.28]; Cavanagh R, 'Interpreting
Relied in Forming an Opinion to the Insurance Contract and the
Decline Indemnity?' (April2000) Insurance Contracts Act' (Paper
Ward & Partners-Insurance presented for members of the NSW
Bulletin 5,6. Bar Association as part of the
35. Horryv Tate and Lyle Refineries Continuing Legal Education
Ltd, (1982) 2 Lloyds Reports 416. Program, Sydney, March 2001) 1,7;
Moran, Note 5 at 8; Gill et al., Note CCH, Note 9 at [5-640L
7 at 3. 45. Hobartville Stud Pty Ltd v Union
36. Stuart v Guardian Royal Insurance Co Ltd ('Hobartville')
Exchange Assurance of New (1991) 25 NSWLR 358; 6 ANZ Ins
Zealand Limited fNo.2j( 'Stuart') Cas 61-032 per Giles J. Tilbury,
(1988) 5 ANZ Ins Cas 60-844. Note 10 at [28.28]; Mann, Note 2 at
Yeldham, Note 3 at 59; CCH, Note 9 [13.40.2]; Gill et al., Note 7 at 3-4.
at [5-640]; Loa, Note 8 at 6; Gill et 46. Komorowski vAustralian Motor
al., Note 7 at 1-2. Insurers(1996) 9 ANZ Ins Cas 61-
37. This onerous obligation was an 303. Tilbury, Note 10 at [28.28];
example proposed by Hoffmann in Gray, Note 1 at 8; Cavanagh, Note
his paper. Hoffmann, Note 12; 44 at 7; Mann, Note 2 at [13.40.6J.
Yeldham, Note 3 at 60; Moran, Note 47. MassoudvNRMA Insurance Ltd
5 at 19. (1995) 8ANZ Ins Cas 61-257.
38. This involves the insurer trying Mann, Note 2 at [13.40. 7J.
to negotiate settlement of a claim 48. Distillers, Note 27 per Stephen
at a lower figure when they are J. Masel, Note 2 at 104.
prepared to pay a higher figure to
settle the matter. Hoffmann, Note 49. Forexample, the Californian
12. Fair Claims Settlement Practices
Regulation. Brown M, 'The Insurer's
39. CCH, Note 9 at [4-215], [5-630], Duty of Good Faith and Fair Dealing
40. For example, insuring a ship in with his Insured under English Law'
relation to a voyage which the (1998) 4 IJIL250, 251.
insurer knows has been completed 50. Brown, Note 49 at 250-251;
or insuring a house against a risk of Moran, Note 5 at 21-22.
fire with the knowledge that the
house has been demolished. See 51. Gill et al., Note 7 at 2-3;
Banque Financiere de la Cite SA v Pickering MH, 'Conflicting Duties of
Westgate Insurance Co Ltd Insurance Lawyers and
(' Banque') [1989] 2 All ER 952 per Intermediaries in Claims
Lord Jauncey. As this case was Investigation and Management'
decided at common law the result (1989) 2 Insurance Law Journal 1,
may be different under the ICA 1-21; Yeldham, Note 3 at 62-67;
where the Court has a discretion to Eggers et al., Note 5 at 13.03.
apply ss.31 and 56. CCH, Note 9 at 52. Gugliotti v Commercial Union
[5-630], [5-640]. Assurance Co ofAustralia
41. Loa, Note 8 at 6. (' Gugliott/) (1992) 7 ANZ Ins Cas
61-104 per Fullagar J where the
42. Gill et al., Note 7 at 2. driver of a motorvehicle which was
43. Haghis Persian Carpet Trading involved in an accident denied that
Cd v General Accident Insurance Co they had been drinking alcohol.

32 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

Masel, Note 2 at 104-104; Gray, 64. Russell v NRMA Insurance Ltd 79.ln Principal Financial Group v
Note 1 at 8; Mann, Note 2 at [unreported) NSW Sup Ct, Rogers Thomas [S.C. of Alabama July
[13.40.4]; Tilbury, Note 10 at CJ Comm 0,8 November 1988. 1991) a lady was awarded
[28.28]; Cavanagh, Note 44 at 8; Mann, Note 2 at [13.30.2J. $1,000.00 in compensatory
CCH, Note 9 at [5-630], [5-640J. damages and $750,000.00 in
65. Masel et al., Note 4 at [13.30J.
53. UBE Packaging Ltd v OBE punitive damages when she sued
66. Trans Pacific, Note 6. Moran, her insurerwho refused to pay for
Insurance (International) Ltd [1996]
Note 5 at 11. her child's funeral expenses. In Fox
2 NZLR 467. Masel, Note 2 at 105.
67. Lampson (Australia) PtyLtdv v Health Net [Riverside County
54. New Zealand Insurance Co Ltd v California Supreme Court, March
Ahden Engineering (Australia) Pty
Forbes (1988) 5 ANZ Ins cas 60- 1994) a husband and his three
Ltd[ 'Lampson') [unreported) Qld
871. CCH, Note 9 at [5-640J. daughters received $12,320,000.00
Sup Ct, Moynihan J, 28 May 1998.
55. Newnham vBaker[1989] 1 Qd Gray, Note 1 at 8; Masel, Note 2 at in compensatory damages and
R 393. Gill et al., Note 7 at 3. 105; Masel et al., Note 4 at [13.69]. $77,000,000.00 in punitive
damages when they sued the
56. NSW Medical Defence Union 68. Barwon, Note 11. Masel, Note 2 deceased wife's/mother's insurer
Ltd v Transport Industries Insurance at 105; Tilbury, Note 10 at [28.28]; for refusing to finance a bone
Co Ltd ['NSW Medical Defence') Gray, Note 1 at 8; Masel et al., Note marrow transplant. Moran, Note 5
(1985) 4 NSWLR 107. Gill et al., 4 at [13.68J. at 22-23; Yeldham, Note 3 at 70-
Note 7 at 4.
69. Barwon, Note 11. Mann, Note 2 72. See also Magarick P, Excess
57. Moraitis v Harvey Trinder (Old) at [14.1 0.8J. Liability-Duties and
Pty Ltd (1969) Qd R 226, per Lucas J Responsibilities of the Insurer[New
70. Einfeld v HIH Casualty &
at 235-236. Whilst this case was York: 2nd ed, 1982) referred to by
General Insurance Ltd (1999) 10
determined at common law Yeldham at 71.
ANZ Ins Cas 61-450. Cf. Obiter
arguably the same result would be 80. ['Cedenco') (1997) 6 NZBLC
comments of Chesterman J in FAI
achieved by application of the ICA,
General Insurance Co Ltd v 102,221.
unless of course the fraud was of a
Australian Hospital Care Pty Ltd 81. Cedenco, Note 80 per Salmon J.
minor nature enabling application
(1999) 10 ANZ Ins Cas 61-445. Loa, Note 8 at 7; Langstone C, 'Bad
of s.56(2). CCH, Note 9 at [5-640J.
Mann, Note 2 at [13.40.10], Faith DamagesArrive in New
58. The 'Litsion Pride', Note 5 per [14.10.10]; Gray, Note 1 at 8. Zealand' [June 1997) Jones Fee
Hirst J at 518-519. Mann, Note 2 at
71. Tancredi, Note 6. Insurers <http://www.jonesfee.co.nz/
[12.10.2]; Masel, Note 2 at 105.
should bearthis in mind when badfaith.htm> 1,1-3.
59. NSW Medical Defence, Note 56; negotiating and preparing 82. A view supported by the English
Leighton, Note 15. Mann, Note 2 at settlement agreements. Gray, Note Court of Appeal in Banque, Note 40
[12.10.2]; Masel, Note 2 at 105. 1 at 8,14. at 997 and Hawke, Note 12 at 93
60. Action Scaffolding vAMP Fire & 72. Swinbank vCleary[ 'Cleary') and 133 indicating that 'contractual
General Insurance Co (NZ) Ltd [unreported) NSW Sup Ct, Einstein damages offer a perfectly adequate
(1990) 6 ANZ Ins Cas 60-970. Cf. J,16November1999. level of compensation and a more
'The Star Sea', Note 5where the secure cause of action'. ALRC 20,
73. Kin re d, Note 16. Masel et al.,
House of Lords held negligence did Note 5 at [328]; Mann, Note 2 at
Note 4 at [13. 70J.
not constitute a breach of the duty. [12.30]; Masel, Note 2 at 102.
Gray, Note 1 at 8; CCH, Note 9 at 74. Banks, Note 24. Masel et al.,
83. Gimson v Victorian Workcover
[5-630]; Masel et al., Note 4 at Note 4 at [14.20]; Gill et al., Note 7
Authority[1995] 1VR 209 per
[13.70]; BirdsJ, 'Uberrima Fides- at 6.
McDonald J; Gibson v Parkes
What Use is the General Principle 75. Loa, Note 8 at 6-7. District Hospital (1991) ['Gibson') 26
Any More?' (2001) Journal of
76. Loa, Note 8 at 7. NSWLR 9 per Badgery-Parker J.
Insurance and Practice <http://
Mann, Note 2 at [12.30J.
www.shef.ac.uk/law/law343/ 77. Comunale v Traders & General
starsea.htm> 1. Insurance Co 328 P.2d 198 [Cal. 84. Yeldham, Note 3 at 76; ALRC 20,
1958). Brown, Note49at250. Note 5 at [328J.
61. CCH, Note 9 at [5-630J.
78. Mann, Note 2 at [12.30]; 85. See Moss, Note 27 per Bollen J
62. See Note 38 above.
Yeldham, Note 3 at 70; Loa, Note 8 who indicated that in an appropriate
63. CCH, Note 9 at [5-630J. at 7; ALRC 20, Note 5 at [328J. case exemplary or punitive
damages may be awarded for a
breach of the duty of utmost good

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 33

 faith. Cole TRH, 'Law - All in Good comments by Powell JA at
Faith' (1994) 10 BCL 18,28. paragraph 4 of the judgement.
86. The US tort of bad faith cases 98. ['Bankstown') (1997) 187 CLR
support this view as does 384.
Transthene Packaging Co Ltd v 99. Eggers et al., Note 5 at 16.38-
Royal Insurance (UK) Ltd [1996]
16.40,16.49-16.50,16.69-16.72.
LRLR 32 per Kershaw J at 40-41 ;
Stuart, Note 36 per Herron J; Pride 100. [unreported) 21 October 1983,
Valley Foods Limited vIndependent Lexis per Hodgson J at 14.
Insurance Company Limited 101. Note 36 per Heron J at 75,280.
[unreported) UK CA, 27 February
1997. See also the discussion below 102. Note 86.
in relation to Moss, Note 27. Cf. 103. Note 86 at 293.
Irving v Manning (1847) 1 HLCas
104. Brown,Note49at257.
287; Ventouris v Mountain ('The
Italia Express') No. 2[1992] 2 105. [1997] CLC 70.
Lloyd's Rep 281; Callaghan v 106. Brown, Note 49 at 259.
Dominion Insurance Co Ltd[1997] 2
Lloyd's Rep 541. Sutton, Note 13 at 107. (1992) 7 ANZ Ins Cas 61-109.
106; Gray, Note 1 at 12; Eggers et Hawke, Note 12 at 136-137.
al.,Note516.71,16.107;CCH,Note 108. Hawke, Note 12 at 136-137.
9 at [23-330].
109. (1999) 10 ANZ Ins Cas 61-420
87. Gray, Note 1at 13.
110. PengilleyW, 'The Impact of
88. Note 83. Consumer Protection Lawon
89. Gibson, Note at 83. Moran, Note Insurance Claims' (2001) 13
5 at 12-14; CCH, Note 9 at [5-640]; Insurance Law Journal 1, 9, 35.
Cameron R, 'Non-contractual Duty 111. Peterson J, 'The Duty of Good
of Utmost Good Faith Considered by Faith in Insurance Relationships:
Su preme Cou rt' (1992) 6[ 1) The Decision in Gibson v Parkes
Commercial Law Quarterly 11, 12. District Hospital' (1994) 24 VUWLR
90. Gibson, Note 83 per Lord 189,207.
Badgery-Parker J. Moran, Note 5 112. s.57(2) ICA. Mann, Note 2 at
at 13; Cameron, Note 89 at 12. [57.10]; Pengilley, Note 110 at 15-
91. ['Dorrough') (1995) 8 ANZ Ins 16.
Cas 61-290. CCH, Note 9 at [5- 113. s.57(3) ICA. Mann, Note 2 at
640]. [57.10]; Pengilley, Note 110 at 15.
92. Note 83. CCH, Note 9 at [5- 114. In HungerfordsvWalker
640]. (1989) 171 CLR 125; 84ALR 119
93. Note 36. the High Court relying on the
principles laid down in Hadley v
94. CCH, Note 9 at [23-330J. Baxendale (1854) 9 Ex 34; 156 ER
95. CCH, Note 9 at [23-330J. 145, sanctioned an award of
damages byway of compound
96. Edwards & Anor v AA Mutual
interest forthe period the insured
Insurance Co (1985) 3 ANZ Ins Cas
was denied access to the funds. The
60-668 per Tompkins J at 79,174;
Court distinguished interest on
Stuart, Note 36 per Heron J at
damages from a damages award
75,281-75,282. CCH, Note 9 at [23-
which sought to compensate a
350J.
party, by reference to interest, for
97. [2001] NSWCA38 [unreported), the loss of use of the money where
New South Wales Court of Appeal, such a loss was reasonably
6 March 2001. See obiter foreseeable. Mann, Note 2 at
[57.10.2]; CCH, Note 9 at [23-330J.

34 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002

115. Note 27. Australian Insurance Law Bulletin of the insurerwere not prejudiced,
116. Mann, Note 2 at [13.20.5], 109, 109-110. Cf. Permanent s.54 precluded the insurerfrom
[13.40.1], [57.10.2]; Masel et al., Trustee v FAI(1998) 44 NSWLR 186 refusing to pay the claim.
Note4at [13.110J. per Hodgson J indicating that where
141. EntweUs, Note 130 per Ipps J
non-disclosure is established s.13
117. Awaiting a police report did at 77,136. Hawke, Note 12 at 131;
adds nothing to s.21. Mann, Note 2
not equate to reprehensible Mann, Note 2 at [13.20.3]; Gray,
at [12.20.1]; CCH, Note 9 at [6-
conduct. Moss, Note 27. Cf. re Note 1 at 18; Masel et al., Note 4 at
010]; Masel et al., Note 4 at [13.95J.
Zurich, Note 12. Moran, Note 5 at [13.100J.
15-16; Mann, Note 2 at [13.40.1]. 130. LBC, Note 19 at [67J. See also
142. Gray, Note 1at 18.
EntweUs v National & General
118. Walker v FAI Insurance Ltd ['Entwells') (1991) 6 ANZ Ins Cas 143. Note 130. Mann, Note 2 at
(1991) 6 ANZ Ins Cas 61-081; 61-059 which indicated that it [13.20.3J.
Hobartville, Note 45 per Giles J; would conflict with the legislative 144. TarrM, 'Dishonest Insurance
Bankstown Football Club vCIC intent if the remedy for breach of Claims' (1988) 1 Insurance Law
Insurance Ltd[unreported) NSW s.13 was greater than that provided Journal 42, 58.
Sup Ct, Cole J, 16 December 1993. for in s.54. Gill et al., Note 10 at 82.
Mann, Note 2 at [57.1 0.2J. 145. Yeldham, Note 3 at 57.
131. Gray, Note 1at 19; Mann, Unfortunately, Justice Buchanan JA
119. (1989) 92 ALR 299; 5 ANZ Ins Note 2 at [48.10]; Cavanagh, Note who delivered the principle
Cas 60-902 at 351; 75,751. Mann, 44 at 12. judgment in Tiep Thi To, did not deal
Note 2 at [57.10.1], [57.1 0.2J.
132. Note 34. Mann, Note 2 at with the relationship between ss.13
120. ALRC 20, Note 5 at [323], [13.10.1]; Masel, Note 2 at 105. and 54, concluding that s.54 was not
[324]; Mann, Note 2 at [57.10], applicable in circumstances of
[57.10.1], [57.1 0.2J. 133. C E Heath Casualty and
fraud which must be dealt with
General Insurance Ltd v Grey
121. ('Swinbank') [unreported) Fed under s.56. Tiep Thi To, Note 140
(1993) 32 NSWLR 25 per Mahoney
Ct FC, 7 February 2000, at 11. Mann, per Buchanan JA at 75,665.146.
JA at 36-38-third party may owe a
Note 2 at [57.1 0.2J. Sections 12 and 13 of the ICA.
duty of utmost good faith to the
122. Swinbank, Note 121 at 11. insurer; 7 ANZ Ins Cas 61-199; 147. Derry v Peek (1889) 14AC337
Mann, Note 2 at [57.1 0.2J. Dorrough Note 91-insurer may
I
at 375; Re London and Globe
owe a duty of utmost good faith to a Finance Corp Ltd(1903) 1 Ch 728
123. Gray, Note 1 at 13. per Lord Buckley at 732-733.
third party. Mann, Note 2 at
124. Note 15. [14.10.5]; Gray, Note 1 at 8, 19; Henchliffe, Note 12 at 214; Sutton,
Masel, Note 2 at 105; CCH, Note 9 Note 13 at 106.
125. Note 67.
at [5-630]. 148. Tarr, Note 144at58;TarrAA,
126. Gray, Note 1 at 13; CCH, Note
134. Wyllie, Note 34 per Hunter J at 'Insurance Law and the Consumer'
9 at [5-640], [6-01 0].
21. Mann, Note 2 at [13.10.1]; CCH, (1989) 2 Insurance LawJournal
127. s.12 ICA; Notes to the Draft Note 9 at [5-630], [5-640]; Masel 106,116-117.
Insurance Contracts Bill 1982; et al., Note 4 at [13.130J. 149. Marksand Balla, Guidebook
Tilbury, Note 10 at [28.26]; Mann,
135. Mann, Note 2 at [13.20.0]; to Insurance Law in Australia
Note 2 at [12.20.1]; Gray, Note 1 at
Gray, Note 1at 19. [Sydney: CCH Australia Ltd, 2nd ed,
6; CCH, Note 9 at [5-640J.
1987) 334.
136. Mann, Note 2 at [13.20.3J.
128. Note 11.
150. Note 140 per Charles JA at
137. Sutton, Note 13 at 108; Gray,
129. Barwon, Note 11 at 74,774. 75,661.
Note 1 at 17.
Finn suggests that the duty of
151. Tiep Thi To, Note 140 per
disclosure arises from a number of 138. Gray, Note 1at 18.
Charles JA at 75,661.
sources-the duty of utmost good
139. Note 130at77,136.
faith pursuant to s.13 of the ICA, the 152. Tiep Thi To, Note 140 per
Trade Practices Act 7974 [Cth), 140. The Magistrate at first Buchanan JA at 75,665; Gugliotti,
equitable estoppel and negligence. instance in Tiep Thi To vAustralian Note 52 per Fullagar J. Cf. Entwells,
Finn PO, 'Good Faith and Fair Associated Motor Insurers Ltd Note 130 per Ipps J. Hawke, Note
Dealing' (1990) 5(9) Australian [ 'Tiep Thi To') (2001) 11 ANZ Ins 12 at 131-132; Henchliffe, Note 12
Insurance Law Bulletin 101, 108; Cas 61-490, see Buchanan JAat at 228; Mann, Note 2 at [13.20.3],
Finn PO, 'Good Faith and Fair 75,662 found that whilst the [13.20.4]; LBC, Halsbury's Laws Of
Dealing [Pt 2)' (1990) 5(10) appellant had breached the duty of Australia, Vol22 [at 11 March 2002)
utmost good faith, as the interests 22 Insurance and Income Security,

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002 35

 'Chapter 11 Part D Dishonest INCE & Co: Insurance Law Bulletin
Claims' [188]. 1,3; Flynn, Note 154 at 2.

153. Note 5, which involved a 157. Gibson, Note 83 per Badgery-

marine insurance claim ratherthan Parker J. Cameron, Note 89 at 12;
a claim under a s.13 ICA type Gill et al., Note 3 at 19; Hawke,
provIsion. Note 12 at 141 ; Pengilley, Note 110
at 1; Cole, Note 85 at 32.
154. The House of Lords rejected
Hirst J's findings in The Litsion
Pride, Note 5, that in the claims
context the duty of utmost good
faith extends to include culpable
non-disclosure or
misrepresentation. Hearn G, 'House
of Lords: "The Star Sea'" (March
2001) Fernandes Hearn LLP
Newsletter 1,2; Flynn M, "'Utmost
Good Faith" In Marine Insurance
Contracts' (Paper presented at the
Maritime LawAssociation of
Australia and New Zealand
Conference, Wairakei, April2001) 1;
Eggers et al., Note 5 at 11.95-
11.96.
155. The House of Lords left open
for future litigation the question of
whether the existence of fraud at
the time the claim is made will
enable the insurerto avoid the
contract, repudiate the claim
entirely or repudiate the policy from
the time of the breach. Coquhoun
M, 'Is There a Limit to the
Continuing Duty of Good Faith?'
(February 2001) Insurance Times 1,
1-2; Birds, Note 60 at 2; Eggers et
al., Note5at 11.95-11.96,11.109-
11.127.
156. Some would argue this is
consumer protectionism gone mad.
See Royal Boskalis Westminster v
Mountain [1997] LRLR 523 and 'The
Mercandian Continent' K!S Mere
Scandia v Certain Lloyd's
Underwriters [2001] 2 LLR 563, for
further examples of cases limiting
the insurer's ability to avoid claims.
Summer J, 'Limited Good Faith'
(2001) 15 The Maritime
Advocate. com <http://
www.maritmeadocate.com/
i15 inth.htm>l, 2; Shepherd M,
Illingworth M and Weir A,
'Insurance Claims-The Impact of
Fraudulent Devices' (March 2002)

36 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #87 DECEMBER 2002