'Commercial decency' underpins insurance transactions

This is an edited version of the 2020 Geoff Masel Lecture, presented by Federal Court Chief Justice James Allsop.

Risk, the underpinning and informing feature of insurance, has been dealt with in a legal, structured form recognisable by the modern practitioner since ancient times.

Take the unique maritime concept of general average, for example. General average has origins in the laws of the maritime city of Rhodes. It was the “system of maritime law by which sacrifices of property made, and loss and expenditure incurred, as a direct result of actions taken for the purpose of preserving a common maritime adventure from peril are rateably shared between all those whose property is at risk in the adventure”. The substance of the rules of general average today remain consistent with its origins. It was an early form of marine insurance, charting new ground, which has persisted to today.

Risk is not new. Nor is its quantification and monetisation. The fluid change in the manifestation of risk derives from changes in human existence and organisation: whether due to technological advances, structural market change, politics, transformation of mediums of communication, or government and legislative intervention.

However, I wish to discuss the changing manifestation of risk in terms of the expressions by law of human values.

Values are hardly new to the law: equity is built on conscience, protection of the vulnerable, and of trust given and relied on; the common law has values at its heart – reasonableness and fairness.

Commercial law is riddled with values in its principles and rules. Without values commercial law would not be certain; rather it would be the arbitrariness and tyranny of the written word, but the written word not as the vehicle for expressing human relationships, but for the expression of power.

Certainty is not gained by the written word alone. It is derived and felt from an understanding of a stable and known position, often a space. That comes as much from a known demand for, and expectation of, a requisite degree of trust, honesty and lack of sharp practice, as from any clarity of expression.

But Parliament, in recent times, has expressed values in statutes more frequently than in years gone by. Importantly, good faith and unconscionability (decoupled from, but still closely related to, their common law and equitable anchors) have been introduced into Commonwealth statutes governing business behaviour.

The task of the profession, and the courts, is to conceptualise and interpret Parliament’s will faithfully in a way that vindicates both the command of Parliament and the techniques and values of the common law and equity.

These matters affect insurance in the contemporary manifestation of risk in the subject matter of indemnity cover, but also affect insurers in the expectations as to their behaviour, in particular, the duty of the utmost good faith. 

Prohibited conduct

Statutes such as the Australian Consumer Law (ACL)and the Australian Securities and Investments Commission Act 2001 (Cth) prohibit conduct that is unconscionable in commerce. The statutes are general in their expression and highly particular in their identification of relevant functions.

The statutes also descend to specificity, looking at factors such as strength of bargaining position, pressure, unreasonable non-disclosure and the intelligibility of documents. From these one does not pick and choose. All the circumstances must be examined and evaluated. 

These factors are not a closed, nor an exclusive, universe. But all deal with the exercise of economic and private power.

In 2016, the unfair contracts regime in the ACLwas extended from only applying to standard form contracts with consumers to contracts with small businesses.

So what is an unfair consumer or small business contract? S24 of the ACL requires that several factors be considered and satisfied:

• a significant imbalance in the parties’ rights and obligations arising under the contract
• the contract not being reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term
• the cause of detriment (financial or otherwise) to a party
• the extent to which the allegedly unfair term is transparent, and
• the contract as a whole.

Those participating in commercial life and the insurance industry have always appreciated that trust and honesty are at the heart of business goodwill, the institution of insurance and the reduction of risk. That should be reflected in commercial law and commercial behaviour.

The statutory imposition of normative standards in commercial dealings, with value-based content derived from equity and common law, brings with it the need to consider in more substance and depth the need to act, as a business, in good conscience. Put another way, it generates an additional operational risk.

What do the broad concepts of “unconscionability” and “unfairness” mean? Unconscionability is less precise or has less shape than “misleading or deceptive”, but is more precise or has more shape than conduct that is merely unfair.

Decoupled from a doctrine to set aside a transaction where it was a basis for relief, it has, in statute, become a basis for a civil penalty as a description of conduct directed to a norm of right behaviour. It is not to be defined because it is indefinable.

Vital to the evaluation of whether conduct in business is unconscionable is the proper approach to the task – look at all the facts, as a whole. Do not isolate constituent parts. The conclusion is an overall evaluation.

It is human behaviour that is to be evaluated and characterised. To behave unconscionably should be seen as serious, often involving dishonesty, predation, sharp practice, unfairness of a significant order, a lack of good faith, or the exercise of economic power in a way worthy of criticism. None of these phrases is definitional.

They are all the kinds of behaviour that, viewed in all the circumstances, may lead to an articulated evaluation of unconscionability. They are standards at the heart of decent commercial behaviour.

Managing non-financial risk (reputational damage and loss of trust) in the post-royal commission world is important. Will the royal commission generate a sustained impetus for businesses to address non-financial risk in human terms before it can manifest in financial loss?

I say “in human terms” because non-financial risk is not an abstracted risk, separate from the human relationships with which it is concerned. Non-financial risk is a lack of trust. The financial services sector is one of the least trusted sectors globally.

Speaking of non-financial risk purely in terms of risk and potential financial loss is not helpful. It narrows the focus and can lead one into error by suggesting that such problems can be dealt with in the same way as other operational risks: through security systems, checks and balances along the way. But that is not so.

To address issues of trust and public confidence in institutions, institutions need holistically to reconceptualise their approach to appropriate and conscionable commercial dealings. One can easily (as some statutes do) fall into the trap of over-articulating and over-abstracting rules in an attempt to bring about good behaviour by companies and their employees.

Good faith is not a new concept. In the insurance context, it was more than 250 years ago that Lord Mansfield in Carter v Boehm cemented the principle that parties to an insurance contract owe each other duties of utmost good faith.

Norms of conduct

The form and nature of the Parliamentary will or command are various. A statute may fulfil many functions. A feature of modern statutes has been the creation of norms of conduct expressed generally as commands for an expected standard of behaviour in relation to social, often commercial activity: s18 of the ACL and other provisions in trade or commerce that deal with unconscionable conduct and unfairness. Some of these norms have an obvious relationship with equity, borrowing directly from it or using it terminologically and substantively as the statute’s source of norms and values.

These statutes are examples of legislative policy, expressed in the required norm of conduct, becoming a source of law. These statutes are more like vehicles for the development of a field of substantive judge-made law, the task of the courts being not so much to construe the language and ascribe meaning, but to develop the norm or doctrine chosen as the criterion for operation of the statute; that is, to fill out the content of the norm.

In these kinds of provisions, the Parliament plainly intends the courts to give shape to the broad mandate of the statute by the values and norms the statute has expressly or implicitly chosen.

The statutes can be seen to be what [High Court] Justice Gummow referred to as “a socially directed rule, expressed as an abstraction, to the infinite variety of human conduct revealed by the evidence in one case after another”.

Such a rule (usually generally expressed in its abstraction) calls forth the need for the process of characterisation of the facts by reference to the content of the statutory norm aided, but not exhausted, by the construction and interpretation of the provision. This distinction, but relationship, between construction and interpretation, on the one hand, and characterisation, on the other, is important.

Such a rule also calls forth the need for caution in the process of construction and interpretation, in the ascription of meaning. The reach of operation or engagement of the provision will be drawn from its application over time to that infinite variety of conduct.

That means great caution needs to be shown in not attempting to fix for all time a rigid content of meaning to the words by over-definition at the outset. The temptation for judges (to which they often succumb) is to take the generality of the words chosen, rearticulate them in terms of attempted exhaustive meaning, often narrowing the generality in search of certainty, and then apply the rearticulated meaning to the facts before them.

This risks freezing, by the rules of precedent, the meaning of the general words to one particular application of them by attempted rearticulated, exhaustive definition. What is thereby created is a more particular and more precisely worded substitute or default or re-presentation of the general word. It is necessary for the judge to articulate, in the context of the human conduct before them, why the general words apply or not, as the case may be.

That articulation should explain what the human elements are that lead to the conclusion (by way of characterisation) that the general words apply, or not. By this process, construction of meaning of the words is interwoven with application to factual context and with explaining or articulating the relationship between the two. 

That involves a recognition that words can only do so much. There is a limit to text. Text is the vehicle for meaning, but meaning must apply to a whole human context.

If a person is required by a statute to act fairly, or efficiently, honestly and fairly, or in good faith, or not unconscionably or not in bad faith, the task of the court is to ascribe a generality of meaning to such words that conform to the generality of the expression, and develop through articulated application of them over time, case by case, the human reality of that meaning through examination of experience and concrete factual situations.

This is not achieved through exhaustive particularised definitional reduction of the general into defined particular expression supposedly capable of fitting over the infinite variety of facts. It is achieved by interpreting the words of generality by referring to the values the statute requires and articulating why the general words are engaged, or not. This recognises the reality that some concepts can only be expressed at an appropriate level of generality if they are to maintain their whole intended meaning.

Statutes that deal with moral values are expressed in language that evokes a moral sense and a requirement for a conscious awareness of self and empathy. Questions such as “Is that fair?” or “Is this unconscionable conduct?” evoke a relational human value and emotion.

To answer such a question one goes to a source of rightness of human engagement. It is as much empathetic emotion or sentiment, as rule.

Moral values are not worked out rationally; they are not defined. Moral values can be seen as a form of experience that is irreducible, like colour or smell. So expressing rules for them is difficult, and expressing definitions of them is impossible.

To explore the best way to think about and decide such questions it helps to ask: How does equity do it? Equity’s technique helps because of its familiarity with the application of such values.

Moral values

Equity recognises moral values in their relational context at the requisite level of generality: loyalty, honesty, trust, confidence and conscionability born of the context and the particular relationship.

Expressions such as “relation of confidence”, “relation of influence”, and “fiduciary relation” do not describe fixed categories possessing fixed and uniform legal content or characteristics. Their content, and the obligations of conscience flowing from them, depend on the particular circumstances.

There are also rules, sometimes very strictly applied, such as the conflict rule governing fiduciaries. Such rules are directed proscriptively to context; not prescriptively requiring doing certain things at certain times. This reflects the inability to express a moral value other than at the requisite level of generality.

Statutes that deal with morality or rightness of behaviour need to be expressed at a requisite level of generality. They must, however, also provide the values and considerations that will attend the judgement that must be made of the generally expressed norm. But the expression of those statutory considerations should not be definitional.

To the extent that a statute over-particularises a human, relational, moral value by abstractly expressed prescriptions, it risks draining the human reality from it, by transforming something able to be recognised as a whole (loyalty, trust, acting in another’s interests) into a deconstructed checklist, unrecognisable as a whole, only seen to be satisfied by detailed consideration of abstracted parts.

Decisions about questions as such unconscionable, unfair, good faith and similar expressions are not reached by applying definitions but by understanding and applying the principle with its attendant value to the facts and circumstances and drawing a conclusion by the process of characterisation, which involves making a value-based judgement by reference to ascribed meaning (construction), found facts (of all relevant circumstances), and expressed principle or rule (containing relevant public or private values).

Non-disclosure remedies

The duty of utmost good faith, since Carter v Boehm, until the reforms in the Insurance Contracts Act 1984 (Cth), manifested itself in remedies for the benefit of the insurer for non-disclosure. Under common law, the remedy for breach by an insurer was rescission: hardly useful in most cases to an insured.

That was so until s13 of the Act implied the duty into all contracts of insurance.

It is valuable that the duty of utmost good faith has not been over-articulated. Several judgements, largely dealing with TPD claims, have established that, when determining a claim for TPD benefits, the insurer must, broadly:

• act reasonably
• apply the policy wording correctly
• consider all relevant material, and
• give the relevant individual an opportunity to respond to adverse information.

That process requires more than mere honesty by the insurer. As the High Court in 2007 in CGU v AMP unanimously confirmed, an absence of good faith is not limited to dishonesty. “Utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, [and] to its own interests … consistently with commercial standards of decency and fairness.”

These broad conceptions “commercial standards of decency and fairness” require examination and consideration using the techniques of characterisation. Minds might differ about any particular conclusion, and the standards are broad, but anchored in fair behaviour.

The special position of insurance to people of all degrees of sophistication is obvious. There is a community and individual reliance on the decency and fairness of behaviour by insurer and insured.

That rules and definitions do not help should not be feared. Commercial decency and fairness are surely not too much for which to ask.

In CGU v AMP, the High Court said the Insurance Contracts Act did not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. However, a punitive element has since been incorporated.

The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) amended the Insurance Contracts Act to, among other things, permit ASIC to take steps where an insurer fails to comply with the duty of the utmost good faith.

Introducing civil and pecuniary penalties to the Insurance Contracts Act was a direct result of the royal commission. Those provisions create very real financial consequences for conduct that falls short of standards of commercial decency and fairness. The statute turns the non-financial risk of misbehaviour (whether intentionally or not) into a tangible financial risk.

Insurers now have to face questions of values in how they behave, and in how their insureds behave.

This is hardly new; nor is it to be feared – as long as the business of insurance is approached by insurers, brokers, and practitioners as one that is relational, human and built on decency, fairness and honourable conduct. The relationships between brokers, underwriters and underwriting agents, advised by knowledgeable practitioners, form the architecture for the carriage of those values.

This has always been the case. The new amendments to the Insurance Contracts Act make it more important than ever to ensure the commercial approach of all insurers should be based on commercial decency and fairness.