An Insurer’s Duty of Utmost Good Faith

Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701

The Chief Justice of the Federal Court of Australia (Allsop CJ) recently added to the growing weight of jurisprudence on breaches by insurers of the duty of utmost good faith. In the decision of Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701 (delivered on 26 November 2020), his Honour was called upon to adjudicate on an application by ASIC seeking declaratory relief against the insurer, Youi, in respect of various alleged breaches of the duty of utmost good faith in contravention of section 13 of the Insurance Contracts Act 1984 (Cth) (ICA).

The application related to Youi’s handling of a particular claim first made in January of 2017 under a Home, Building and Contents Policy of Insurance in relation to damage suffered to the insured’s property in Broken Hill in November of 2016.

ASIC alleged that Youi had failed to handle the insured’s claim with full and frank disclosure, fairness, and in a timely manner.

A statement of agreed facts and admissions was submitted to the Court, by which Youi essentially conceded various breaches of the duty owed.

It was admitted that:

  • the ICA applied to the policy;
  • a breach of the implied term of utmost good faith constituted a breach of the ICA; and
  • Youi had failed to act consistently with commercial standards of decency and fairness and with due regard to the interest of the insured, thereby breaching the implied term of utmost good faith in contravention of section 13 of the ICA.

As a result of the statement of agreed facts and admissions, the scope of the dispute between the parties lay within a narrow compass, and ultimately the trial only addressed the number and precise terms of the declarations to be made by the Court.

With the parties’ agreement, the Judge determined the matter on the papers.

His Honour referred to the application of section 13 (as regards the conduct of an insurer),  reported in Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd (No 2) [2020] FCA 588; 379 ALR 117 and CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; 235 CLR 1.

Quoting from the Delor Vue v Allianz decision, His Honour noted:

… the obligation of good faith is at the statute says the “utmost good faith”. A lack of honesty is not a prerequisite…”

Whereas the classic example of an insured’s obligation of utmost good faith is a requirement of full disclosure to an insurer (that is to say, a requirement to pay regard to the legitimate interest of the insurer) “conversely an insurer’s statutory obligation to act with utmost good faith may require an insurer to act consistently with commercial standards of decency and fairness, with due regard to the interests of the insured.”

It was noted in CGU v AMP that:

“… while a want of honesty will constitute a failure to act with the utmost good faith, want of honesty is not necessary in order to establish a failure to act with the utmost good faith in the context of a contract of insurance. The notion of acting in good faith entails acting with honesty and propriety. Lack of propriety does not necessarily entail lack of honesty. Further, the concept of utmost good faith involves something more than mere good faith.

The precise content of the concept of utmost good faith depends on the legal context in which it is used. In the context of insurance, the phrase encompasses notions of fairness, reasonableness and community standards of decency and fair dealing. While dishonest conduct will constitute a breach of the duty of utmost food faith, so will capricious or unreasonable conduct.

utmost good faith involves more than merely acting honestly: Otherwise, the word “utmost” would have no effect. Failure to make a timely decision to accept or reject a claim by an insured for indemnity under a policy can amount to a failure to act towards the insured with the utmost good faith, even if the failure results not from an attempt to achieve an ulterior purpose but results merely from a failure to proceed reasonably promptly when all relevant material is at hand, sufficient to enable a decision on the claim to be made and communicated to the insured.” (See, e.g., Gutteridge v Commonwealth unreported, Supreme Court of Queensland, Ambrose J, 25 June 1993).

Factual background

In November of 2012, the insured (Ms Sacha Murphy) took out a policy for home, building and contents insurance with Youi in respect of her home in Broken Hill. The policy was renewed annually thereafter. On 14 October 2015, Youi sent to the insured a letter confirming that the policy would be renewed with an effective renewal date of 16 November 2015 and an expiry date of 15 November 2016. A policy schedule and PDS dated 1 July 2015 were enclosed with the letter. The following was contained in the PDS under the heading “Choice of repairer”:

If your claim is accepted and your item can be repaired, at our option, we will arrange repairs with a repairer who is acceptable to us.

Wherever possible, we will offer you a choice of repairer from our network of recommended repairers.

You may choose another repairer; however we may not authorise repairs. If we do not authorise repairs we will pay you for the fair and reasonable cost of repairs as determined by us, considering a number of factors, including comparison quotes from an alternate repairer we choose and our Quality Guarantee will not apply.

You must choose a repairer that is appropriately licensed and authorised by law to conduct the required repairs.”

Meanwhile, on 11 October 2016, Youi entered into a service agreement with a company called ProBuild Australia Pty Ltd (PA), pursuant to which PA agreed to provide (as a member of Youi’s network of “recommended repairers”) services including home building repairs, home building replacement assessments, inspections, re-inspections, re-assessments, rectifications and catastrophic damage repairs. The service agreement was for 12 months commencing on 5 October 2016.

On 11 November 2016, the Broken Hill area was hit by a severe hailstorm that damaged the insured’s home and, in particular, the roof, an air conditioning unit, the veranda and some contents items.

An estimated 52,387 claims were made across parts of New South Wales, Victoria and South Australia arising from the same hailstorm, with an approximate loss value of $597,000,000; this was subsequently characterised by the Insurance Council of Australia as a catastrophe.

As at 11 November 2016, Youi had two active builder service providers in the Broken Hill area, and PA was added to Youi’s list as a third builder service provider in that area.

The insured lodged a claim under the policy on 25 January of 2017 in response to which (on 27 January 2017), Youi requested PA to assess the damage and provide a quotation to rectify the damage. PA inspected the insured’s property on 2 February 2017 and emailed its inspection report to Youi on 10 February 2017. Various communications between PA, the insured and Youi followed, and by 5 May 2017, the insured had returned a signed copy of the scope of works provided and remitted the excess due under the policy to PA.

Around that time, Youi commenced an investigation into the claims allocated to PA in the Broken Hill area. That investigation was initiated following Youi’s receipt between 6 February 2017 and 3 May 2017 of three complaints from other insureds regarding the quality of PA’S workmanship and delays in repairs being carried out by them in the Broken Hill area.

On 5 May 2017, Youi communicated with PA in the following terms:

…YOUI has a number of concerns in relation to repairs being carried out in Broken Hill by ProBuild. Feedback being received is of poor communication and delays in repairs…

Please find attached a questionnaire including a list of authorised claims in the region. Please complete the questionnaire providing detailed feedback.”

PA completed and returned the questionnaire.

Around a fortnight later, Youi decided to suspend PA as a service provider in the Broken Hill area. That decision was communicated to PA on 19 May 2017. At that time, Youi communicated internally with its staff, requesting current and new claims not be allocated to PA.

A consequence of Youi’s decision was that on 23 May 2017, PA was suspended from Youi’s network of recommended repairers for the Broken Hill area for the purposes of the “recommended repairer” term in the PDS. Following PA’s suspension, Youi received a further letter of complaint from another insured in Broken Hill regarding PA’s poor communication, lack of professionalism, inadequate supervision and substandard workmanship.

As a result of PA’s suspension, Youi gave direction to its staff that no new work was to be allocated to PA and any existing work where repairs had not been commenced by PA would be reallocated (as much as possible) to another contractor, The Roof Company Pty Ltd (RC).

On 1 June 2017 a direction was given by Youi to ascertain whether PA had ordered materials for the repairs to the insured’s property or started work on the job. If that was not the case, the authority to PA was to be cancelled and reallocated to RC.

Youi communicated with PA in relation to the insured’s claim on 6 June 2017 and was advised that PA’s site manager had attended the insured’s property on 2 June 2017 to check measurements. Youi asked PA to refrain from ordering any materials. The next day, PA emailed Youi, indicating that materials had been ordered but not yet delivered. On 28 June 2017, Youi received from PA a spreadsheet with details of PA’s outstanding work in the Broken Hill area.

The insured contacted Youi on 29 September 2017 to advise that PA had still not commenced work and she was unhappy with the continued delays. On enquiry by Youi, a representative of PA advised that the repairs to the property would be commenced on 3 October 2017. That same day, Youi advised PA it would not be extending or renewing PA’s service provider contract beyond the current period.

On 4 October 2017, the insured emailed Youi stating that she had been waiting almost 12 months for the work to begin and that the $775 excess had been paid 7 months previously, expressly so the repair work could commence.

On 5 October 2017, the insured informed Youi by phone that part of the roof of her home was open to the elements and rain was forecast. Youi contacted PA and asked them to send someone to the insured’s property to undertake make-safe works by covering the roof with a tarpaulin to prevent further damage. PA did not, in fact, undertake the make-safe works and did not inform Youi that it had not covered the roof. Youi made no enquiries as to whether the make-safe work had been performed.

On 6 October 2017, the insured phoned Youi and advised that lead contamination from the damaged property was exposing her to a serious health risk as she was by then pregnant. She said PA had “packed up and left”.

The Insured emailed Youi a formal letter of complaint on 2 November 2017. This complaint detailed over six pages of various grievances with Youi’s handling of the Claim. One particular matter raised was that the delays in the completion of the repairs to the roof meant that the remediation works at the Property recommended by the EPA to remove the lead contamination were consequently delayed.

Eventually, on 15 February 2018, Youi appointed another authorised repairer (RC) to proceed with the repair work to the insured’s property. RC produced a scope of works which the insured informed Youi was inadequate to cover the original damage and the subsequent issues which had arisen as a result of PA’s delays.

In response, the Insured emailed both Youi and RC in identical terms on 20 February 2018and noted that they were “still in different ballparks in regards to the damage now relevant from both the initial incident and further in-competencies”. The 20 February 2018 email set out the Insured’s concerns as to various deficiencies in the RC Scope of Works such that it was in her view insufficient to rectify all of the damage that the Property had sustained and which needed to be repaired in fulfilment of the Claim.

RC then issued a revised scope of works to the insured on 13 April 2018, which was signed and returned to RC that same day. RC commenced the repairs to the roof of the property in early May 2018, and the majority of the works were completed on about 18 May 2018. However, repairs to the bathroom damaged by water ingress as a result of PA’s failure to undertake make-safe works were not completed until around 8 November 2018.

Various failings were admitted by Youi, and it further admitted that the policy was a contract of insurance to which the ICA applied and that, pursuant to section 13 (2) of the ICA, a breach of the implied term of utmost good faith constituted a breach of the ICA.

Youi admitted the following breaches of the duty of utmost good faith:

  1. Failure to handle the claim with full and frank disclosure and with fairness.
  2. Failure to handle the claim in a timely manner.
  3. Failure to handle the claim in a timely manner as regarding the make-safe issue.
  4. Failure to respond to the 2 November 2017 complaint with clarity and candour and in a timely manner and failed to handle the claim in a timely manner.
  5. Failure to act consistently with commercial standards of decency and fairness with due regard to the interest of the insured and in each case, Youi thereby breached the implied term of utmost good faith in contravention of section 13 of the ICA.

His Honour considered declaratory relief to be appropriate and that it was unnecessary to decide whether power existed under section 1101B of the Corporations Act 2001 (Cth) as ample power existed from section 21 of the Federal Court of Australia Act 1976 (Cth) to make orders.

His Honour also agreed that as the statutory regulator, noting ASIC was the appropriate party to seek the declarations.

He said that the form of declaratory relief should identify for the purposes of both the defendant and others in the industry that conduct of this character is a breach of the important duty of utmost good faith and will be exposed to the community as such.

His Honour considered that a single declaration was sufficient to express the different occasions and different conduct that amounted to the contravening conduct.

The declaration made was in the following terms:

  1. From 19 May 2017 to on or about late December 2017 or January 2018, Youi failed to take reasonable steps to:
    • Inform the insured that the contractor it proposed to carry out repairs to the insured’s property had been a subject of numerous complaints to Youi in respect of delays and the quality of its work;
    • Inform the insured that PA was not a repairer acceptable to Youi and/or a repairer from Youi’s network of recommended repairers for the purposes of and as required by the policy;
    • Afford the insured an opportunity to request the appointment of a repairer (other than PA) from Youi’s network of recommended repairers, as required by the policy; and
    • Seek to terminate the engagement of PA notwithstanding the matters in sub-paragraphs i. – iii. above.
  2. From 24 May 2017 to about 29 September 2017, Youi failed to take reasonable steps to ensure that any builder commenced repairs to the property.
  3. From on or about 4 October 2017 to at least 15 November 2017, Youi failed to take reasonable steps to effect make-safe works to the property.
  4. From 2 November 2017 to at least 18 May 2018, Youi failed to take reasonable steps to consider and respond to the formal complaint made by the insured on 2 November 2017.
  5. From 20 February 2018 to 5 April 2019, Youi failed to take reasonable steps to respond to the email the insured sent Youi on 20 February 2018, thereby further delaying the completion of the repairs.

First published in the LexisNexis Australian Insurance Law Bulletin 2021 . Vol 37 No 1.

For more information, please contact:
Debra Lane

Debra Lane
Director
p.  +61 8 8124 1806
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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