Current trends in claims management: A warning to insurers – the duty of utmost good faith – ASIC v Youi [2020] FCA 1701

In July 2020 we published an article that outlined our view that poor claims management by insurers is leading to unnecessary costs and delay in payment of claims and wasteful litigation. This in turn reflects poorly on the industry.[1]

As a strong reminder to insurers that they must act in utmost good faith in the handling of claims, in his recent judgment in Australian Securities and Investments Commission v Youi Pty Ltd [2020] FCA 1701 Chief Justice Allsop upheld the Insured’s claim that Youi had breached its obligations in section 13 of the Insurance Contracts Act 1984 (Cth) because it failed to comply with its duty of “utmost good faith” to the Insured because of the manner that it handled the insured’s claim. The case is a timely reminder of the consequences that can follow if an insurer fails to competently handle a claim and comply with its duty of “utmost good faith” to the insured.

The facts

The insured held a home building and contents insurance policy. The insured’s property was damaged after a severe hailstorm. In January 2017, the Insured made a claim on the policy. Youi appointed one of its network builders to assess the damage and carry out the repair works.  Between February and May 2017 Youi had received complaints about the quality of workmanship and delays in repairs carried out by its nominated builder that had been assigned to repair the insured’s house. It suspended that builder from its network for any future jobs but the builder remained on the insured’s site. After further substantial delay, the builder finally commenced the rectification works in October 2017 but did not carry out the works adequately. The insurer failed to appropriately address the insured’s concerns about the delays and the workmanship.  Further delays in completion of the repairs ultimately led to a complaint which was taken up against the insurer by the relevant regulatory body, ASIC.

The result

His Honour held that the insurer breached its obligation to act in utmost good faith to the insured because it failed to take reasonable care to:

  • inform the Insured that the contractor it proposed to carry out repairs to the Insured’s property had been the subject of numerous complaints to Youi in respect of delays and the quality of its work;

  • inform the Insured that the builder 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;

  • failed to take reasonable steps to ensure that any builder commenced the repairs to the Property;

  • failed to take reasonable steps to consider and respond to the formal complaint made by the Insured; and

  • failed to take reasonable steps to respond to an email the Insured sent to Youi, which further delaying the completion of the repairs.
The lesson

While the facts in the above are not particularly remarkable and relate to a relatively small building claim, the result in this case is a warning and lesson for insurers.  Insurers should take heed of the extraordinary costs that can be incurred if there is a failure to properly handle a claim in compliance with the duty of utmost good faith implied into each insurance contract by section 13 of the Insurance Contracts Act 1984 (Cth).

The result of Youi’s failure to act in utmost good faith was that proceedings were commenced by ASIC of behalf of the insured. Both parties were represented by leading Senior and Queen’s Counsel and top-tier law firms. Although the matter was ultimately determined “on the papers” without the need for an in-person hearing (almost 4 years after the insured’s claim was made on the policy), the cost of the proceeding is likely to have substantially outweighed the costs of repairs to the insured’s house. Obviously, it is in insurers’ best interest that such claims handling errors be avoided and that everything is done to properly handle claims as the law dictates that they must.

Utmost good-faith – s 13 Insurance Contracts Act 1984 (Cth)

In his judgment Allsop CJ helpfully reiterated the principles that will be applied when the Court considers whether an insurer has complied with its obligation to act in utmost good faith as implied into contracts of insurance by s 13 of the Insurance Contracts Act 1984 (Cth).

It is important to recognise that a lack of honesty is not required to find a breach of that duty. An insurer must act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured, including responding appropriately in a timely way to claims made. The notion of acting in good faith entails acting with honesty and propriety. The phrase encompasses notions of fairness, reasonableness and community standards of decency and fair dealing. For example:

  • A failure to make a prompt admission of liability to meet a sound claim for indemnity and to make payment promptly may be a failure to act with the utmost good faith on the part of an insurer - 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.

  • A failure by an insurer to make and communicate within a reasonable time a decision of acceptance or rejection of a claim for indemnity, by reason of negligence or unjustified and unwarrantable suspicion as to the bona fides of the claim by the insured, may constitute a failure on the part of the insurer to act towards the insured with the utmost good faith in dealing with the claim.

An insurer should make full and frank disclosure and deal with the insured with clarity, candour, and in a timely way. For both insurers and insured’s alike, the obligation for insurers and insureds to act in utmost good faith in relation to each other is a fundamental principle of insurance law. As ASIC v Youi demonstrates, the Court will enforce what is often treated by insurers as an ethereal obligation that requires only “lip service”, in a very substantive concrete way.

Throughout the claim resolution process, if insurers fail to professionally and competently work through claims issues with the insured and their broker; articulate a coverage position clearly on a well-reasoned basis; and remain open to alternative views if further information or submissions are put forward, insurers are likely to find themselves before the Federal Court and may end up embroiled in costly and unnecessary litigation bought by a comparatively well-armed and resourced regulatory authority.

[1] https://bellrock.com.au/2020/07/20/claims-trends-strategic-denials/