The duty of utmost good faith applies to all aspects of the relationship between an insurance company and the insured person. It also applies to any third party beneficiary to the contract. The duty arises when negotiations for the insurance policy commences and does not end until the settlement of any claim.

Part II of the Insurance Contracts Act 1984 (Cth) implies the duty into every insurance contract to which the legislation applies. Breach of the duty is a breach of contract, as well as a breach of the legislation. Civil penalties apply to a breach of the legislation. The duty exists at common law as well as in the legislation.

There is no definition of the duty in the legislation. The High Court of Australia in CGU v AMP [2007] HCA 36 has described the duty of the insurance company towards the insured as the requirement to “act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured."

The scope of the duty is very broad and may include the following:

Claims Handling

Delays by the insurance company in dealing with claims can be very detrimental to the insured person. Damaged to property such as a home or car means that property cannot be used by the insured person. Additional costs are incurred providing alternative accommodation or transport whilst repairs are done. An insurance company must be frank about the progress of claims and inform the insured person about any delays.

From January 2022, all services that provide claims handling and settling must have an Australian Financial Services licence (AFSL). This means that claims handling services (which are often separate from insurance companies and therefore not required to comply with the same laws) are subject to clear regulation under the Corporations Act 2001 (Cth), including providing their services efficiently, honestly and fairly. Australian Securities and Investments Commission oversees and regulates all AFSL holders.

Responding to complaints

The Insurance Code of Practice 2020 sets out timeframes for insurance companies to respond to complaints. Despite this, some insurance companies are slow at responding to complaints. An insured person can complain about delays in response times as well as the substance of the complaint.

More information about the Insurance Code of Practice can be found on the General Insurance Code of Practice website [link opens in a new window].

Insurance Investigations

Insurance companies have the right to investigate claims where there is a suspicion of exaggeration or fraud. This is part of the insurance company’s risk management. An insured person has a duty to co-operate with an investigation. This includes providing relevant information if requested by the insurance company and participating in an interview. For example, an investigator might ask for bank statements or medical reports

Having an insurance claim investigated can be very stressful for an insured person and can delay payment of a genuine claim. An insured person is entitled to get legal advice to understand their rights, as well as make a complaint if the investigation is not conducted fairly.