The Federal Court of Australia’s determination in Australian Securities and Investments Commissions v Youi Pty Ltd  FCA 1701.
In a recent decision of the Federal Court, the Court considered what conduct could constitute a breach of each party’s duty to an insurance contract to act with ‘utmost good faith’, as required by section 13 of the Insurance Contracts Act 1984 (Cth) (ICA).
The claimants (Mr Murphy and Ms Orr) held a home building and contents insurance policy with Youi for their home in Broken Hill, NSW (Premises). In 2016, the Premises’ veranda, roof, and contents were severely damaged in a hail storm.
In January 2017, the claimants lodged a claim with Youi regarding the damage (Claim). Youi subsequently sought that ProBuild Australia Pty Ltd (ProBuild) attend the Premises to assess the damage and provide a quote for the repair works. ProBuild provided a property inspection report to Youi in early February 2017.
From February 2017 to May 2017, several unrelated and independent complaints were lodged with Youi in respect of the quality of repair works and delays in the undertaking of repair works by ProBuild in the same area. As a result of these complaints, Youi suspended ProBuild’s services in May 2017. Despite taking these steps, Youi did not, however, remove ProBuild from the claim for the Premises.
In October 2017, some ten months after the Claim’s lodgement, ProBuild eventually commenced work at the Premises. ProBuild failed to undertake the repairs adequately, and the repair works were further delayed. As a result of these shortcomings, the claimants lodged a formal complaint with Youi in November 2017. Youi failed to address the claim until May 2018 (some six months later).
Pursuant to section 14 of the ICA, the Australian Securities and Investments Commission, brought proceedings against Youi, alleging that Youi’s failure to handle the Claim with full and frank disclosure, fairness and in a timely manner constitutes a breach of Youi’s statutory duty of utmost good faith. ASIC sought declaratory relief to that effect.
The obligation and the determination
The statutory obligation contained in section 13 of the ICA requires the parties to an insurance contract to act with utmost good faith, which was equated by the Court as an obligation to ‘act consistently with commercial standards of decency and fairness, with due regard to the interests of the insured’.
In this case, Youi did not dispute the fact that it had failed to act reasonably in its handling of the Claim. It was determined that Youi had failed to exhibit decency and fairness in the handling of the claim without full and frank disclosure, clarity, candour and that its agents had failed to complete the repair works promptly.
In light of the above, the Court determined that Youi’s conduct fell short of the utmost good faith obligation and constituted a breach of the ICA. In terms of the declaratory relief sought by ASIC, the Court determined that ‘the form of declaratory relief should identify, for the purposes of both [Youi] and others in the industry, that conduct of this character is a breach of the important duty of good faith and will be exposed to the community as such. In that way, declarations assist in clarifying the law’s application, warning others of the dangers of contravening conduct, and alerting other insureds to their rights’.
What does this mean for insurers?
While delays in progressing claims may be par for the course in insurance (due to back and forth correspondence, administrative processes etc..), insurers must prioritise full and frank disclosure to their insured and ensure that their subcontractors, repairers and agents undertake necessary works in a timely manner. Failure to do so may lead to a breach of an insurer’s utmost good faith obligation.
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