Delays in claims handling found to be a breach of the duty of utmost good faith

The Federal Court of Australia considered what conduct can constitute a breach of the duty of utmost good faith in the recent decision of Australian Securities and Investments Commissions v Youi Pty Ltd [2020] FCA 1701.

Authors: Priya Paquet, Mark Frewen-Lord
Judgment date: 26 November 2020
Citation: Australian Securities and Investments Commissions v Youi Pty Ltd [2020] FCA 1701
Jurisdiction: Federal Court of Australia

The decision concerned the conduct of the insurer in managing a property damage claim and subsequent delays which followed. While not disputing its failure to act reasonably in the circumstances, the insurer had its conduct become the subject of a declaration that it breached s13 of the Insurance Contracts Act 1984 (ICA) relating to its handling of a claim and use of builders the subject of several complaints.

Principles

• Dishonesty is not a prerequisite to establishing a breach of the duty of utmost good faith imposed on parties to a contract of insurance by s13 of the ICA. Complying with s13 requires something more than simply acting honestly or acting with mere good faith.
• An insurer's statutory obligation to act with utmost good faith requires an insurer to act consistently with commercial standards of decency and fairness with due regard to the interests of an insured.
• The Federal Court has power under s21 of the Federal Court of Australia Act 1976 (Cth) to grant declaratory relief to parties without considering its powers under the Corporations Act 2001 (Cth).

Background

Ms Murphy and Mr Orr (together referred to as the claimants) held a policy for home building and contents insurance with the insurer for their home in Broken Hill (the property). The property was the subject of severe hail damage which affected the claimants' roof, veranda and contents on 11 November 2016.

They made a claim under the policy on 25 January 2017, following which the insurer requested that ProBuild Australia Pty Ltd (PA) assess the damage and provide a quote for rectification. A property inspection report was provided by PA to the insurer on 10 February 2017.

The insurer received three complaints between 6 February 2017 and 3 May 2017 from two other claimant parties regarding the quality of work and delays with respect to repairs carried out by PA in the Broken Hill area. As a result of the complaints, the insurer suspended the use of PA's services as of 19 May 2017 but failed to remove PA from this particular claim.

PA did not commence work on the property until 4 October 2017 and failed to carry out those repairs properly, which further delayed the process. The claimants lodged a complaint on 2 November 2017 which went unaddressed until 18 May 2018.

ASIC, in its capacity as the statutory regulator, brought proceedings against the insurer seeking declaratory relief for breaches of its duty of utmost good faith pursuant to s13 of the ICA. ASIC alleged that the insurer failed to handle the claim with full and frank disclosure, fairness, and in a timely manner.

Decision

As the insurer had made formal concessions as to its conduct and the legal consequences, the primary question in issue concerned the appropriate form of declaratory relief.

Allsop CJ followed the findings in CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36 that acting consistently with commercial standards of decency and fairness was most apt to inform why the insurer had breached its duty of utmost good faith in the circumstances.

On that basis, declaratory relief was granted to ASIC in that the insurer was declared to have breached s13 of the ICA for failing to:

• take reasonable steps to inform the claimants that PA was the subject of numerous complaints and was no longer an acceptable repairer to the insurer;
• give the claimants an opportunity to request a repairer other than PA;
• terminate the engagement of PA;
• take reasonable steps to ensure builders commenced repairs on the property;
• take reasonable steps to effect make safe works to the property;
• respond to the claimants in a timely manner, thereby delaying the repairs.

Why this case is important

Delays in the claims process are not unusual but insurers can fall foul of s13 of the ICA if they do not ensure that care is taken to ensure that its agents or subcontractors' actions do not lead to a breach. Insurers can avoid such action by ensuring that their insureds are provided full and frank disclosure and repairs are undertaken in a timely manner.

This case also serves as a reminder that ASIC has the power to bring an action against an insurer as the statutory regulator. While the Corporations Act 2001 provides for such powers, s14A of the ICA gives ASIC the specific power to bring an action against an insurer who failed to comply with the duty of the utmost good faith in the handling or settlement of a claim or potential claim.