In 1982, the Australian Law Reform Commission emphasised that insurers and insured people must always act in good faith towards each other in Report No. 20 on insurance contracts (which led to the enactment of the Insurance Contracts Act in 1984). The ALRC suggested that the law should clearly state that this duty of good faith applies to all parts of their interaction, including how claims are handled.

However, in his recent speech, “Limits on the Duty of Utmost Good Faith”, Justice Jackman said the report and the provisions present a clear absence of “any limitation on the broad scope of the duty”.

Jackman J referenced CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007), whereby the High Court accepted that the duty of utmost good faith is not limited to dishonesty, as well as Allianz Australia Insurance Ltd v Delor Vue Apartments (2022), whereby the High Court “agreed that the implied condition of utmost good faith is not limited to honest performance”.

“Commercial lawyers typically prefer the law to be more precisely expressed, and with more predictable application than those statements allow. We tend to be attracted by the crispness of well-articulated legal rules, and repelled by the sogginess of such indeterminate principles. The problem is illustrated by the fact that the nine judges who decided Allianz v Delor Vue at various levels of the judicial hierarchy were split 5:4 on the issue of utmost good faith under section 13 of the Insurance Contracts Act,” he stated.

“The majority reasoning in the High Court seems to reflect an uneasiness with the notion of utmost good faith and gives fresh impetus to what I respectfully regard as a misguided aim of limiting the operation of the concept. Despite the studied reverence with which we are trained to approach judgments of the High Court, there are aspects of this reasoning which I find deeply troubling.”

One limit on the duty of utmost good faith is that the duty is not fiduciary in nature, Jackman J continued, adding that this duty “does not demand unnatural altruism, nor does it require an insurer to sacrifice its own interests in the event of a conflict with the interests of the insured”.

“The second, and slightly more controversial, limit to the duty of utmost good faith, there is an issue as to the nature of the duty once parties are in litigation against each other and complaint is made concerning the conduct of that litigation, for example, in relation to disclosure of documents or the defences relied upon by an insurer. In Manifest Shipping Co Limited v Uni-Polaris Shipping Co Limited [2003], the House of Lords held that the obligation of utmost good faith under section 17 of the Marine Insurance Act 1906 (UK) did not continue to apply unqualified once the parties to a policy of marine insurance were in hostile litigation before the courts,” he added.

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“On [the reasoning of this case], there are important changes in the parties’ relationship that come about when litigation between them starts. There is no longer a community of interest, the parties are in dispute, and their interests are opposed. Most importantly, their relationship and rights are now governed by the rules of procedure and the orders which the court makes on the application of one or other party. The battle lines have been drawn, and new remedies are available to the parties.”

The third limit, said Justice Jackman, is that according to the High Court, the duty has two aspects: it’s a “principle upon which a contract of insurance is ‘based’ and thus assists in the recognition of particular implied duties”; and it is an “implied condition on existing rights, powers, and duties, governing the manner in which each contracting party must act towards the other party ‘in respect of any matter arising under or in relation to’ the contract of insurance”.

“The point which the High Court majority appears to be making is that one cannot rely simply on the duty of utmost good faith in broad terms, but one must identify particular implied duties which stem from it,” he continued.

“Consistently with the nature of the relationship of good faith between an insurer and an insured, there is an implied limitation on the manner in which an insurer may act when, as in that case, its interests conflict with the insured’s in relation to compromising a claim against the insured, in which case the implied limitation is that the insurer must exercise its powers with due regard to the interests of the insured.”

The fourth and “even more controversial” limit to the duty of utmost good faith, according to Justice Jackman, is the requirement the High Court imposed in Allianz v Delor Vue that the particular duty emanating from the requirement of utmost good faith must be “coherent” with the operation of existing legal doctrines.

“The majority of the High Court held that there had been no irrevocable election or waiver, and no detriment so as to give rise to an estoppel by reason of representations by the insurer to the insured. The insured contended that the insurer had a duty not to depart from its clear representation a year earlier that it would not rely on section 28(3) for failure to comply with the duty of disclosure, and the insured relied on the duty of utmost good faith in addition to those preclusionary doctrines,” he said.

“The High Court majority described such a duty of not departing from the insurer’s prior representation as a ‘novel duty’, reflecting the previous point which I have examined to the effect that the requirement of utmost good faith must be given particular content in terms of some narrower and more refined duty. However, if the duty is simply regarded in the terms of section 13(1) as the duty of utmost good faith, then it could not be described as ‘novel’, being a duty which is at least 250 years old and has been enshrined in Australian statutory law since 1909 in the context of marine insurance, and since 1984 more generally.”

The fifth and final of the limits on utmost good faith also stems from Allianz v Delor Vue, where the High Court majority insisted on the application of that principle being “coherent with the generally symmetrical operation of the Insurance Contracts Act”.

“With respect, this is very odd language,” Jackman J said.

“The Insurance Contracts Act clearly identifies the particular and separate rights and powers of the insured and the insurer, and those respective entities are not interchangeable. A contract whereby one party promises to indemnify another for loss in exchange for a premium is about as asymmetrical as a contract can be.

“If the majority intended merely to say that the requirement of utmost good faith is imposed on both parties, then a more appropriate description would have been to say … that the duty is ‘mutual’. But to insist on a ‘symmetrical’ operation of the duty of utmost good faith in the particular circumstances of a given case, because of a perceived symmetry inherent in the Insurance Contracts Act as a whole, is to make the duty unworkable.”

As such, whether these limits “can withstand analysis in future cases remains to be seen”, concluded Jackman J.

“Lawyers may not be comfortable travelling through the pearly fog of a principle as vague as utmost good faith, but if the fog is burned off, the landscape which is revealed may well prove to be savage and brutal,” he said.