Mutual duty in insurance contracts
23 Dec 2016
A High Court judge has held that a mutual duty of good faith is implied in every insurance contract. Damages may be awarded for breach of that duty.
The plaintiffs (the trustees of the Young trust) owned a residential property in the Christchurch hills insured by Tower Insurance Ltd ("Tower"). The property suffered significant damage as result of the Canterbury earthquake sequence in 2010 and 2011 and claims were lodged accordingly.
The central issue for the Court to consider was whether the property could be repaired to the standard required under the insurance policy, or whether it needed to be rebuilt. However, the plaintiffs also alleged that Tower had failed to act in good faith, and sought general and exemplary damages.
Having noted that insurance is a contract of utmost good faith, and Tower’s agreement to be bound by the Fair Insurance Code 2016, Gendall J held that a contractual duty of good faith is implied into every insurance contract, and is a duty that flows both ways.
While he declined to define the full scope and limits of the duty, the judge found that, as a bare minimum, the duty requires an insurer to:
(a) Disclose all material information that the insurer knows or ought to have known. This duty includes, but is not limited to, the initial formation of the contract and arises during and after the lodgement of a claim.
(b) Act reasonably, fairly and transparently. Again, the duty includes, but is not limited to, the initial formation of the contract, and arises during and after lodgement of a claim.
(c) Process a claim in reasonable time. This obligation must take into account the time required properly to investigate and assess all aspects of the claim. What is “reasonable” will depend on the circumstances, which may include the type of insurance policy, the size and complexity of a claim, compliance with any relevant regulatory parameters, and factors outside the insurer's control.
Importantly, an insurer will not breach the implied term by failing to pay a claim during a dispute (provided there are reasonable grounds for that dispute). However, Gendall J noted that the conduct of the insurer in handling the claim will be relevant when deciding whether the duty of good faith has been breached.
The Judge held that Tower breached its duty by failing to provide an early report that recommended a rebuild of the house (despite that report being superseded by later assessments). The report had been provided to Tower's claims processing agent early in the claims process and was not passed on to Tower until later. The failure to provide the report made little difference to the outcome of events, and the plaintiff was awarded nominal (general) damages of $5,000. Exemplary damages were not available for a contractual breach, and, in any event, were not justified by the insurer’s behaviour.
The Judge’s ruling that a general contractual duty of good faith is implied in every insurance contract is a new development in New Zealand insurance law, and the parameters of that duty have yet to be defined. It is important to note that the duty is mutual. The plaintiffs’ own conduct attracted criticism from the Judge and adversely affected some of their claims.
- Hesketh Henry: Christina Bryant and Richard Belcher