Duty of utmost good faith and s 29 ICA: No breach by insurer

24 January 2024

The Federal Court has found that an insurer did not breach its duty of utmost good faith in its approach to procedural fairness prior to terminating an IP policy.

The insured was given ample opportunity to address the insurer’s concerns regarding the misrepresentations of prior health issues and was unlikely to have been honest in their non-disclosures.

In issue

  • The primary issue was whether Zurich had breached its duty of utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth)(ICA), by its conduct prior to terminating an insured’s income protection (IP) policy for fraudulent non-disclosure of health issues.
  • In reaching its decision the Court considered whether the insurer was required to notify the insured of its concerns of fraud, whether the insurer was required to inform the insured of avenues of dispute or appeal, and whether the insurer was required to make further enquiries.

The background

In June 2016 the insured, with the assistance of a financial advisor, purchased an income protection (IP) policy from OnePath Life (now Zurich).

After receiving the letter of offer from OnePath, which was expressly subject to an exclusion in relation to mental illness, the insured accepted the terms of cover. The insured was made aware of her duty of disclosure on a number of occasions prior to accepting OnePath’s offer of IP cover.

In 2018 the insured made a claim for and received IP benefits from Zurich as a result of a right shoulder injury.

During their investigation of this claim Zurich discovered that the insured had been hospitalised on 6 occasions between 2001 and 2005 for mental health related treatment, which had not been disclosed by the insured.

Zurich investigated and provided the insured with an opportunity to address its concerns.

The insured’s justification was that her financial advisor had told her that she only needed to disclose details of her mental health history for the 5 years prior to the application date and, as a result, she did not disclose the admissions.

Zurich subsequently terminated the insured’s IP policy on the basis that had she initially disclosed the admissions, the IP cover would not have been offered to her.

The decision at trial

ASIC alleged that the manner in which Zurich conducted procedural fairness prior to terminating the IP policy breached its duty of utmost good faith.

ASIC’s claim was dismissed, with the Court finding that Zurich did not breach that duty.

Jackson J considered that it was open to the insurer to conclude that the insured’s non-disclosures were the product of selective dishonesty, i.e. where the application questions were clear in their terms and it was implausible that the financial advisor would have advised the insured to provide less information than what the application form expressly required.

The Court further considered that Zurich provided the insured with ample opportunity to explain the circumstances of the non-disclosures, and that Zurich’s omission of reference to the insured’s rights of review and appeal was an administrative error.

Implications for you

This case is a useful reminder to insurers of the appropriate approach to take, and the factors to consider, before making a decision to terminate insurance cover under s 29(2) ICA. The decision also highlights that not all omissions by an insurer will result in a finding of breach of the duty of good faith. More particularly, although the insurer did not call certain evidence, and did not provide certain information to the insured, the Court nevertheless rejected the argument the insurer was in breach of its duty of good faith.

Australian Securities and Investments Commission v Zurich Australia Limited (No 2) [2023] FCA 1641

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