What is Good Faith? Why isn't it Mutual?

One of the cornerstones of Insurance Law is a concept called utmost good faith.

Words like good faith connote images of a reasonable Insurer acting in a fair and reasonable manner. However, in practice, the concept of good faith is anything but reasonable or fair. Instead, the concept is a brutal tool that perverts any general concept of what is fair and reasonable.  

The High Court has confirmed that a contractual duty of good faith is implied into every insurance contract. Importantly, it also identified that it is a duty that flows both ways.

In practice, the issue of utmost good faith commonly arises in cases of non-disclosure. Let me explain how that works. Firstly, insurance is based on risk. When an insurer chooses to insure something, they need to understand and quantify the risk. Generally, this means that they need you, as the insured (and sometimes the risk) to tell them about the risk. This concept is called the duty of disclosure.

Utmost good faith means that if you omit something important or material when telling the Insurer about the risk or when making a claim, that is a breach of that duty of disclosure. In practice, this can lead to some absurd and clearly unfair outcomes.

The remedy for a breach of the duty of disclosure is that the Insurer can deny your claim, vary your insurance policy or cancel your insurance altogether.

These remedies have drastic and disproportionate results on the Insured. Indeed, rejecting a claim or cancelling a contract where someone has innocently failed to disclose something to an Insurer does not sound fair or reasonable.

What is also of concern is that there is minimal guidance regarding the reciprocal obligations of good faith on the Insurer.   There are some general comments about claims handling and timeliness. However, under the concept of utmost good faith, there is no obligation on an Insurer to ensure that (this is not an exhaustive list):

  1. The customer understands and is informed of the terms of the insurance policy;

  2. The customer understands the process for making a claim;

  3. The customer has adequate cover;

  4. The customer has the cover that they requested;

  5. The customer is paid whilst a claim is being disputed;

  6. The customer has the opportunity to routinely check and correct the information they provided to the Insurer as part of the duty of disclosure; and

  7. The customer is proactively informed of their entitlement to make a claim.

 

What is most unfair in the current system is that there is no direct entitlement to damages if an Insurer is found to have breached their (minimal) obligations of good faith owed to their clients. Therefore, the effect of a breach of good faith has drastically disproportionate outcomes depending on whether you are an Insured or an Insurer.  

This failure in the law emboldens Insurers to make unfair decisions and shields them from the impact of those unfair decisions. This is unfair and contrary to any general concept of what is meant by good faith.

Tim Gunn