Utmost good faith when investigating and assessing claimsJun 2021 | Insurance
The Federal Court of Australia has found that TAL Life Limited (TAL) breached its duty to act with utmost good faith pursuant to s 13 of the Insurance Contracts Act 1984 (Cth) (ICA) in seeking to avoid an income protection policy.1
The insurance claim in question was the subject of a case study before the Financial Services Royal Commission and a referral to the Australian Securities and Investment Commission (ASIC) to investigate.
The decision is the culmination of one of a number of such investigations undertaken by ASIC in the wake of the Royal Commission, and by no means is it expected to be the last. It serves as useful guidance for insurers on the extent of their obligations when investigating and assessing an insured’s claim for indemnity.
In December 2013 the insured made a claim under an income protection policy (Policy) with TAL, after she was diagnosed with cervical cancer.
After investigating the insured’s claim, TAL discovered that the insured suffered from a period of depression between 2007 and 2009, which was not disclosed when taking out the Policy. TAL subsequently rejected the claim, and avoided the Policy, based on the insured’s failure to disclose this prior history of depression. TAL wrote to the insured in terms that the non-disclosure was in breach of her own duty of good faith under s 13 of the ICA and her duty of disclosure under s 21 of the ICA, and reserved its rights to seek reimbursement of any benefits already paid under the Policy.
There was no dispute that the prior condition was unrelated to the insured’s cervical cancer.
The insured sought internal review of TAL’s decision, and when that was unsuccessful lodged a dispute with the Financial Ombudsman Service (FOS), which was resolved on commercial terms.
As noted at the outset, the insured’s experience became a case study before the Royal Commission, which resulted in a referral to ASIC. Following investigation ASIC commenced proceedings against TAL, alleging (among other things) that it breached the duty of good faith under s 13 of the ICA in the manner it avoided the Policy, notwithstanding the FOS resolution.
ASIC advanced five central allegations that TAL breached its duty of good faith by:
- conducting a ‘policy validity investigation’ to investigate whether there were grounds to avoid the Policy reason of non-disclosure, without notifying the insured;
- conducting a retrospective investigation of the claimant’s medical history that went beyond her gynecological health that could be associated with her cervical cancer;
- avoiding the Policy for reasons not soundly based in medical opinion;
- avoiding the Policy without affording the insured an opportunity to address any concerns about non-disclosure; and
- alleging the insured herself breached the duty of good faith, and threatening to recover benefits paid under the Policy.
Section 13 of the ICA implies into every policy of insurance a provision requiring each party to act towards the other with utmost good faith. The duty is owed in respect of any matter arising under, or in relation to, the policy. Justice Allsop held that a decision to avoid a Policy is ‘a matter in relation to’ it, and that TAL was therefore obliged to act towards the insured with utmost good faith in how it went about deciding and dealing with that question.
The duty of good faith is not limited to honesty or propriety. It involves, in the case of an insurer, acting consistently with commercial standards of decency and fairness, with due regard to the interests of the insured.2
His Honour stated at the outset that the assessment of how TAL conducted itself was to be undertaken recognising that the insured was not just a contracting party under the Policy (viewed in a disembodied way) with rights and obligations in law, but was a person to whom, and to whose financial security, the Policy was important. His Honour said that such considerations do not of themselves create separate legal rights, but inform the context and circumstances by reference to which standards of behaviour are to be judged.
That is so because the content of the duty implied by s 13 and its application in individual cases is not limited to the exercise or discharge of legal rights in the abstract, but rather involves consideration of the human context of the people concerned. It is the acting towards each other - with commercial standards of decency and fairness - that is expected of both an insurer and insured by the terms of s 13.
Justice Allsop found that TAL’s conduct breached the duty of good faith in two key respects.
Firstly, his Honour found that TAL failed to act towards the insured with decency and fairness by reaching its decision to avoid the Policy without giving the insured any notice of its investigation and in failing to afford her an opportunity to address its concerns.
Central to that issue was whether the process that was undertaken demonstrated decent and fair treatment, rather than the merits of the avoidance itself.
As noted above, his Honour acknowledged that the Policy was of great importance to the insured. She was a 39 year old woman of modest means, and was gravely afflicted by cancer. With that in mind, it was found that ‘standards of decency, fairness, fair dealing and reasonableness demanded that the [insured] be given a proper opportunity to put matters to TAL: to explain what happened'.
His Honour considered that:
- the covert way the investigation was carried out, and the lack of an opportunity to influence the decision before it was made, demonstrated a lack of a decent and fair treatment; and
- a ‘proper’ opportunity to address TAL’s concerns required that it occur ‘prior’ to the decision being made to avoid, not simply catered for in fairness and decency by an internal review function after a considered decision to avoid had already been made.
Secondly, his Honour found it ‘clear’ that the insured was treated without decency or fairness in being told that she had herself acted without good faith, and by the threat of recovery of benefits paid under the Policy. His Honour said the former remark was in the circumstances a groundless and hurtful statement (which, to TAL’s credit, it was contrite about), while the latter was harsh and unfair given the insured’s circumstances and the covert nature of the investigation then being undertaken.
The judgment reinforces the high standard expected of insurers when investigating and assessing an insured’s claim for indemnity. That is because, as it was summed up by Justice Allsop, ‘Insureds are not only risks; they are people’.
On a more practical level, it offers a number of takeaways for insurers when investigating a claim (and in particular when looking to maintain a declinature or avoid a policy), including that:
- an insured should be given notice of an insurers’ investigation of circumstances supporting a declinature or avoidance (as opposed to undertaking any investigation in a covert manner);
- an insured should be given an opportunity to address any concerns arising from an investigation, prior to a decision being made (such as by issuing a soft declinature); and
- any allegations to be advanced against an insured regarding its own conduct should only be made if legitimate grounds exist and it is reasonable to do so in the circumstances.
1 Australian Securities and Investments Commission v TAL Life Limited (No 2)  FCA 193.
2 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, 12.
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.