Enduring constants remain in winds of change
This is an edited version of the 2017 annual Geoff Masel Memorial Lecture series delivered by Justice Margaret Beazley, President of the NSW Appeal Court.
Spreading risk through insurance has been central to economic and social activity for centuries.
Lawyers turn to Lord Mansfield for its foundational common law principles and, in particular, the seminal decision of Carter v Boehm in which Lord Mansfield enunciated the principle so familiar today: the doctrine of utmost good faith.
Notwithstanding the sophistication of today's market, the principle of utmost good faith enunciated in 1766 remains central, albeit its application has been extended by statute.
And its meaning and application continues to be a little elusive. Since the introduction of the Insurance Contracts Act 1984 (IC Act) and the 2013 amendments, insurance law delivers an exquisite suite of statutory and common law principles and concepts. An understanding of their interaction is fundamental for the modern insurance lawyer as is the vast regulatory regime which now sits as an umbrella over the insurance industry more generally.
The duty of utmost good faith (DUGF) is entrenched in statute. Unlike the common law, where the duty was mostly played out in the area of pre-contractual disclosure and where the impracticality of the remedy of avoidance to an insured meant an insurer was effectively immune from its rigours, under s13 of the IC Act, the duty is mutual and contractual. Importantly, s12 says the DUGF is not to be limited or restricted by any other law or provision of the Act save that the duty of disclosure to an insurer is a separate and comprehensive obligation under s21.
By making the DUGF an implied term of the contract, the IC Act fundamentally altered the remedies available for breach. At common law, the remedy for breach was "avoidance", whereby the other party could avoid the contract from inception.
Under the Act, breach of the DUGF is a breach of an implied term of the contract as a consequence of which the aggrieved party can sue for damages under the contract and, where appropriate, the doctrine of specific performance, which will be of particular relevance where an insured is seeking the remedy.
Where the insurer is seeking the remedy, adequate remedies are probably provided by the IC Act itself, for example, s54, s56, and s60.
A finding that an insurer has breached the DUGF does not automatically entitle an insured to indemnity under the policy. See CGU Insurance Ltd v AMP Financial Planning Pty Ltd  HCA 36; 235 CLR 1.
In 2013, the IC Amendment Act amended s13 to provide that a breach of the DUGF is a breach of the Act's requirements. That allows for intervention by ASIC, which may exercise its powers under the Corporations Act 2001 to vary, suspend or cancel an Australian financial services licence or ban people from providing financial services. ASIC can also bring a representative action on behalf of an insured if it is of the opinion it is in the public interest to do so.
The explanatory memorandum for the 2013 legislation explains that the rationale for the change is enforcing compliance with the DUGF through private legal action may be too great an expense for some parties and does not provide long-term solutions to systemic breaches of UGF committed over time.
ASIC's report on the findings of its review, prompted in part by perceived culture problems of claims handling in the life industry, said there was a policy reform initiative in progress to enable ASIC to seek civil penalties where insurers have breached the DUGF.
Currently, other than bringing representative action under s55A, an insurer's breach of the DUGF only enlivens ASIC's licensing powers. ASIC also recommended the exemption for "handling insurance claims" be removed from the conduct provisions of the Corporations legislation.
In February 2017, the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 came into force. That Act, which takes effect on 1 January 2018, amends the Corporations Act 2001 to remove the exemption from the ban on conflicted remuneration for life insurance providers, who often receive high up-front commissions which, according to the second reading speech, incentivises policy replacements where there is no consumer benefit.
The other significant change to the DUGF enacted in 2013, and one which goes not to enforcement but the scope of the duty, is the extension of that duty to third party beneficiaries.
Scope and content of the duty
What then is the scope and content of the DUGF as implied into insurance contracts following enactment of the IC Act? By s13, the DUGF applies to all matters arising under or in relation to the contract. S13's broad language makes it clear the duty applies in the formation stage of the contract as much as when the contract is on foot. That conclusion is reinforced by s13(4), which provides that the duty to third party beneficiaries only operates after the contract is entered into. S13(4) would have no work to do if the duty did not apply in the formation stage of the contract.
When the IC Act was enacted, there was "some doubt' on whether the common law DUGF extended to determining and paying claims and there were no reported cases in Australia applying the duty to claims payment.
Before the IC Act, there was no reported case in which the common law duty clearly operated to the benefit of the insured. That was partly because the remedy of avoidance of the contract, which was the only remedy available, was of little use to an insured.
The Act alters that position. Where the Act applies, the DUGF may be invoked by the insured and there is little doubt the duty applies to determining and paying claims.
In Sudesh Sharma v Insurance Australia Ltd t/as NRMA Insurance  NSWCA 55, the court found the insurer was obliged to determine a claim for indemnity in a timely manner and without due delay.
In Ensham Resources Pty Ltd v Aioi Insurance Co Ltd  FCAFC 191 Justices Lander and Jagot said the obligation of UGF "continues to operate upon the party in any litigation arising under the contract of insurance".
However, there is authority for the proposition that, once litigation has started, the DUGF is superseded or exhausted by the rules of litigation.
Content of the duty
In AMP Financial Planning Pty Ltd v CGU Insurance Ltd  FCAFC 185; 146 FCR 447, Justice Emmett said the concept of UGF, in the context of insurance, "encompasses notions of fairness, reasonableness and community standards of decency and fair dealing", and that dishonesty was not a prerequisite for a breach of the duty.
The High Court's CGU v AMP decision on appeal from the Full Court's decision is the leading case on the meaning of UGF.
The High Court delivered several separate judgements in that case. A common position was that lack of UGF is not to be equated with dishonesty only; in other words, one need not prove dishonesty to establish a breach of the DUGF.
The DUGF is a reciprocal duty. It follows that the standard by which conduct is adjudged should be the same for insured and insurer.
It is perhaps unsurprising that the content of the DUGF has not received comprehensive judicial elaboration since the enactment of the IC Act or, indeed, since Carter v Boehm was decided 250 years ago. The concept of UGF is an evaluative concept attached to a particular context. The context is one of risk. The nature of the risk will be as various as the types of insurance cover and the nature and extent of the cover.
For that reason the concept of UGF is best articulated in general terms, as it was in CGU v AMP, so as to be adaptable to a specific context. Formulations such as "decency and fairness", "reasonableness" and "due regard to the interests of the insured" are well understood evaluative concepts in commerce and in law as much as in everyday parlance and leave room for flexible application to the facts of the case.
The High Court's non-prescriptive approach in CGU v AMP is unlikely to be overruled while ever there is a human making the "judgement call". In the meantime, the inner and outer limits of the content of the DUGF in its statutory form awaits further judicial determination. CGU v AMP will remain a, and probably the, first port of call.
The introduction of statute into the field of insurance has, so far, had a soft landing. While the changes are significant they haven't altered the underlying precepts of insurance law as such. The principles of construction of insurance contracts remain, but policy terms will need to be construed in light of the statutory provisions.
There is still a DUGF and an obligation of disclosure, but their scope, extent and application have been altered and clarified and the consequences of breach significantly altered to reflect an appropriate balance between the insured and the insurer. The presence of an effective statutory watchdog in the mix aids this balance.
So far, the impact of statute on the industry and on the law has been positive. No longer can it be said, as did former High Court Justice Michael Kirby when he described the state of insurance contract law in 1976 that it is "chaotic" and "not so much a moveable feast, as a gorgonzola".
But if, like the connoisseurs of cheese, you consider gorgonzola a cheese with bite – perhaps it remains an appropriate descriptor of the vibrant insurance market.