Insurance Law and Utmost Good Faith - Coursework Example

Insurance Law and Utmost Good Faith Name: Institution: Course Title: Instructor: Date: Insurance Law and Utmost Good Faith 1.0 Introduction Insurance policies have a significant position in Australian economy as they ensure that policy holders and victims are compensated and restored to their previous position or at least an ability to reconstruct after a loss that cannot be compensated through loss of life. This means there is need for good faith in the engagement between the policy provider and the client in two way traffic and not caveat emptor approach. This means each party has a tortuous duty of disclosure by avoiding fraud and misrepresentation (Schoenbaum, 1998, p.1). Carr (2010, p.438) observes that one party in the contract can renege the contract based on the fact that before the conclusion of insurance contract the other party did not disclosure full details. The concept of utmost good faith is an exception in most contractual agreements, in the countries with common law systems like Australia one is not obliged to disclose the same in general contractual agreements, but obliged to do so in marine and non-marine insurance. The aim of this paper is to examine what the common law and legislature has accomplished so far in order to safeguard the doctrine of good faith in insurance. 2.0 Utmost Faith in Insurance In insurance the two engaged bodies are obliged to disclose any information that can impact on the decisions made by each other (Carr, 2010, p.437). This is an exception to other contractual agreements where each individual are required to be legally aware of what they are entering into. The concept implies a great deal of honesty and trustworthiness in disclosure and claims. The legal service Commission of South Australia (2012) observes that the Insurance Contract Act 1984 (Cth) places statutory obligations that all contractual agreements in insurance be conducted with utmost good faith as enshrined in section 13 of the Act. The legal service Commission of South Australia provides a list of the duty of utmost good faith. Under the act, insurers are obliged to evaluate claims without undue delay, prompt payment of the claims once verified, not to employ undercut approaches so as not pay the client and advising the customers about the policy he or she has taken in terms of what is covered and what is not covered. On the other hand, the insured has the obligation of disclosing information required by the insurer so as to accept the risk, they are required not to give a false or exaggerated claims and the need to cooperate with insurer while making claims. The other perspective of academically understanding utmost good faith is to contrast it with the bad faith principle. In academics, the term bad faith can be traced from the philosophical works of Jean-Paul Sartre who did a lot of analyses in relation to double speak (Solomon, 1972, p.288). In philosophical view, double mindedness can be through intentional deceit of other or through self deception. This kind of work views the concept as one who is having two semi- independent acting minds within one mind. Moreover, this concept can be seen as a situation whereby one acts as if he or she is influenced with certain ideologies yet in the back of his or her mind she or he has a different thought or belief (Flynn, 2009, p.84). Connected to this line of thought is the Kantian philosophy. This kind of approach encourages one to do what is ought to be done. This is a normative kind of thinking that is abstract and oriented towards ethics (Graham, 2011, p.92). Thus, the two theories connect by embracing ethics and honesty rather than deceit, ill will, fraud or misleading information. Apart from the above, academically especially in line with the philosophy of existentialism, bad faith is seen by Santre as the imperfection of belief. He notes that the fact that no belief ever succeeds in being what it needs to be therefore it turn to be a bad faith. Moreover, he notes that both bad and good faith wants to flee the imperfection of belief. However the difference is that good faith wants to flee the not believing what one believes into being and bad faith flees being into the not believing what one believes. In a nutshell, bad faith is seen as believing something that at the same time it quite consciously disbelieves, insofar as its belief fails to integrate certain elements of its world, leaving them outside its belief and clashing with it (Wood, 1988, p.220). 3.0 Role of Legislature in Safeguarding Utmost Good Faith Principle One of the integral roles of legislature is to make laws that govern various aspects of a country. In addition, it is evident that societies are dynamic and thus, legislations should be reviewed after a period of time so that they can reflect the reality on the ground making interpretation and application of the same easy. This will go a long way in addressing the common goal of laws which is delivering justice to all parties. The legislations in Australia pertaining insurance has evolved overtime so as to ensure level playing field for all involved parties (Kirby, 2010, p.3). Before the reforms that brought in the new Act (Insurance Contract Act 1984), the insurance industry was marked with numerous contradictory statutes. Kirby the former chairman of Australian Law Reforms Commission gives a recollection of how the situation by then. Kirby (2010, p.5) recalls that by then there were variety of legislations governing insurance industry and its operations. He further observes that most legislation in Australian pertaining to insurance was wholly adopted from United Kingdom without any proper domestication to reflect Australian context. During this period there legislations like Australian Marine Act 1909, Life Assurance Act 1774, the Fire Prevention Act 1774 and the Marine Insurance Act 1788 (Merkin, n.d, p.7; Kirby, 2010, p.5). Moreover, during this period, the country still accepted other imperial laws which were written in archaic and obscure language (Kirby, 2010, p.5). As result of non domestication and synchronisation, there emerged legal gaps in the coherence of the governing laws. Most of these legislations by then were not abreast with the trends in the industry, society and macro- level developments. This implies confusion and chaos in application of the laws pertaining to insurance resulting into unfavourable outcomes. According to Kirby (2010, p.5), “state law had been piecemeal and sporadic, often limited to particular types of transaction or attempting to deal with specific insurance problems”. Thus by 1978 Australian Law of Insurance Contract Placed many players into limbo whereby it was difficult to do in-depth legal interrogation of an individual’s acts (Kirby, 2010, p.7). Out of this gap that existed by then, those who suffered most were the insured. The reason behind this was that most clients only became aware that what they signed during the contractual agreement was not what they expected (Kirby, 2010, p.9). This was like a rip off especially to the insured. In earlier years when this policy was applied with full vigour, the policy holder lost all his/ her claims if it was proven that he or she made a fraudulent claim or did not make full disclosure. This made the claimant more vulnerable as compared to the insurer (Bremen, 1999, p.89). The role of legislature in sprucing up this industry came in 1976 when Attorney General sought the indulgence of the Australian Law Commission for a critical review of insurance law (Merkin, n.d, p.7). The drive to re-evaluate the legislations pertaining to the insurance industry were necessitated by the problems and challenges outlined in the above paragraphs. The commission according to their mandate produced a seminal report number 20 and a draft bill of the same. The draft bill addressed numerous factors pertaining to insurance industry with one of them being utmost good faith in the interaction between insurer and the insured. With the level of engagement that all stakeholders had, the Australian parliament passed the bill presented to them by the commission with some minor alterations only. The new Act (Insurance Contracts Act) provides a legal framework for the general insurance industry. However, it doesn’t impact on marine insurance which is still guarded by Marine Insurance Act 1909 and reinsurance which is catered for by common law principles (Merkin, n.d, p.8). 3.1 Utmost Good Faith and Insurance Contract Act 1984 Currently, the key legislation governing contractual relationship between the insured and the insurer is the Insurance Contacts Act 1984 which since inception has undergone certain improvements. For the specific topic of contention, section 13 of the same Act which covers the obligation of utmost good faith as an implied term into the insurance agreement. Section 13 of the act states that “a contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.” Section 14 subsection (1) & (3) outlines how parties should not rely on provisions except in the utmost good faith. The sections state that “If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision. In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise.” The observation drawn by Merkin (n.d, p.13) is that even though the concept is meant to address the issues of the two parties (insurer and insured), the concept affects the insurer more than the insured. For instance, section 14 of the legislation provides for reliance on policy terms from the insurers side instead of the insured. In addition, the insured is not obliged to disclose any information and if so, it is when they fall within the requirements of pre-contractual requirement (Section 12 of Insurance Contracts Act 1984). Section 13 of Insurance Contracts Act 1984 equally asserts the belief that good faith is in favour the insured under insurance law. Under this section, the insurer cannot ask court to imply a term if their initial agreement didn’t indicate a need for post disclosure. The above observations then can be seen as deviation from pre 1984 when the insurers had more leverage than the insured. Other amendments that have been done to the Act include section 21 A which provides for exception on areas which do not require disclosure as initially explained in section 22. From section 26 to 3o issues of misrepresentations are dealt with. he above shows how legislature has gone far to safeguard the doctrine of good faith in insurance by giving a clear legal procedures and allowing courts to enforce implied terms in insurance contractual agreements. In a nutshell, the effectiveness of legislature in addressing the concept of utmost good faith can be best understood from two eras. The first is pre 1984 where utmost good faith was guided by pre-agreement misrepresentations & disclosures which were mostly implied on the insured and post- agreement requirements which targeted mostly the insurer. However the two conditions had exceptions with decisions going reverse. The second is post 1984 and subsequent amendments where the law has tried to create a vivid difference between post and pre contractual expectations in relations to disclosures and misrepresentation as directed towards insured and insurers respectively. 4.0 Utmost Good Faith and Common Law Common law is normally referred to us as judge made law. In Australia where the practice is common, judges are allowed to make interpretations so long as they are within the supreme law. In addition to this, they can rely on precedent set earlier to deliver their judgements. The justice system is meant to serve justice to all irrespective of the agreement that was there before. This argument is made strong by the fact that in common law, the major decision making stage is at the trial. It is at the discretion of the judge or a bench of judges to decide to acquit or penalise an individual based on the evidence/ argument presented by the defence and the appellant/ prosecution (Papadopoulos, 2004, p.3).If contract that is signed by two parties does not adhere to certain legal and social principles, even if it was written down it would be prudent for courts to revoke or provide remedies. The essence is on the fact that judicial system should be proactive rather than being based on technicalities. One of the justifications that have been used to support the call that court should provide remedies is bad faith in insurance contracts and social justice. In some written agreements, issues of dishonesty, imbalance of power, coercion and limited choices might result in unlevelled playing field (Blum, 2007, p.11). The key to any agreement should be fairness where both parties gain (Nussbaum, 2004, p.6). Court through its powers can revoke such agreements since they are not built on good faith, but on exploitation. This becomes called for in an event where one exploits the low know how of the other party. In legal context, it is observed that the term bad faith is subjective. However, the positive aspect is that the conceptual framework is built on ill will or deceit in order to gain unfair advantage (Carsley and Shacter, 1997, p.241). These unfair advantages can also be seen in terms of sinister motives and withholding of information so that one could inflict revenge or subvert the course of justice. From the above observation, it seems that the concept of bad faith is adopted in most judicial systems so as to guarantee morals. This kind deviates away from basing most cases and judgments of technicalitie to a moral point of view. It is indeed true that if judiciary is to achieve its purpose of transmitting justice to both parties, then the intention of both the plaintiff and the defendant should be taken into consideration (Carsley and Shacter, 1997, p.241). Clerk (2011), observes that under Australian law we can have implied terms in the contractual agreements. She notes that these are what the law implies into the contract notwithstanding the fact that they have not been discussed by the parties or referred to in a contract. These implied terms, may be implied at common law or by statute. From the wordings in section 13 and 14 of insurance contracts act 1984 one can see an application of implied terms. The same belief is corroborated by Merkin (n.d, p.13). To quote “Utmost good faith is, an implied term which applies to both parties to the contract. Accordingly it regulates their dealings with each other during the currency of the policy, although the phrase “in relation to” suggests that it may also apply pre-contractually. Moreover, under s 14 of the Act, reliance on any policy term other than in accordance with the requirement of utmost good faith is not permitted. It follows that breach of the duty of good faith is a breach of contract which either gives rise to damages or to an estoppel, or does not give rise to avoidance ab initio.” Uttermost good faith has been enforced by the courts so as to avoid fraudulent claims by the insured or denial of payment by the insurer. A case example that can be used to show how the common law has been used to gurantee good faith in insurance contracts is the of Australian Associated Motor Insurers Ltd v Ellis & Anor. The contention of the case was based on lack of informing the policy holder about the policy restrictions. The initial policy by the defendant which was motor vehicle comprehensive insurance prohibited the policy holder from making any structural modifications on the car without prior permission from the insurer (applicant). The contention of the case was that after the expiry of the first policy, the insured renewed the same with the insurer. After renewal, the policy holder did some structural adjustments on the car by fitting “mag” wheels. Later in some stages, the car of the insured got damaged while being driven by her daughter. However, post analysis showed the wheels were not the cause of the damage. The contention of the case as advance by the plaintiff in her application was that the insured should not be paid by the insurer since he made some modifications to the car without informing the policy provider. However, justice Cox of Supreme Court of South Australia ruled the contrary by giving leverage to the defendant. The judge noted that the first contract had expired and this was a new one and thus it was the onus of the insurer to inform the insured of the regulations governing the new policy and the accompanying consequences if the same is breached. The judge applied section 13 of the Insurance Contracts Act on utmost good faith. 5.0 Conclusion The aim of the paper was to explore the concept of utmost good faith in insurance contracts by examining what the common law and the legislature have accomplished in order to protect the concept. From the discourse, it emerges that insurance contract does not operate on the same principle of other contracts as informed by caveat emptor, but by good faith where all players are required to act in transparency by disclosing accurate details. In their part, the legislature of Australia has tried to protect the principle of utmost faith in insurance contract. The first effort is seen from the restructuring done from 1976 giving birth to Insurance Contracts Act 1984 thus, absolving various players from the chaos that reigned earlier. This legislation has undergone numerous improvements like section 21A so as to address the same. This shows that the legislature has been effective in guaranteeing the topic. At the same time it emerged that common law have equally played a critical role in guaranteeing the same. Through powers vested to judges of applying implied terms and ability to review statutes the judges have given numerous rulings that protect utmost good faith by delivering judgments in favour of different parties. References Blum, A. B. 2007. Contracts: Examples & Explanations. New York: Aspen Publishers. Bremen J. 1999. Good Faith in Insurance Contacts – Obligations on Insurers 1999 19 ABR 89. Carr, I. 2010. International Trade Law 4TH Edition. Abingdon, Oxon: Routledge-Cavendish. Carsley, F. L. and Shacter, M. R. ‘Good faith and fair dealing in the commercial context’ in Campbell, Denis and Susan Cotter. 1997. Comparative law yearbook of international business. London: Kluwer Law International. Clarke, J. 2011. Australian contract law: terms of contract. Retrieved on 29 September, 2012 from: www.australiancontractlaw.com/law/scope-terms.html. Commonwealth Government of Australia, Insurance Contacts Act 1984. (1990) 6 AZN Insurance Cases 60-957. Flynn, T. 2009. Existentialism. New York: Sterling Publishing Company. Graham, G. 2011. Theories of ethics: an introduction to moral philosophy with a selection of classic readings. New York: Taylor and Francis. Kirby, M. 2010. Australian insurance contract law: out of the chaos – a modern, just and proportionate reforming statute. The Hugh Rowell Memorial Lecture Delivered at Australian Insurance Law Association National Conference 2010. Legal Service Commission of South Australia, 2012. The duty of utmost good faith. Retrieved on 29 September, 2012 from: http://www.lawhandbook.sa.gov.au/ch23s01s01s01.php. Merkin, R. nd. Reforming insurance law: is there a case for reverse transportation? A report for the English and Scottish Law Commissions on the Australian experience of insurance law reform. Nussbaum, C. M. 2004. “Beyond the Social Contract: Capabilities and Global Justice.” Oxford Development Studies Vol. 32, No. 1, pp. 1-16. Papadopoulos, Ioannis. "Introduction to comparative legal cultures: the civil law and the common law on evidence and judgment (oral presentation of the book by Antoine Garapon & Ioannis Papadopoulos, Juger en Amerique et en France : Culture judiciaire française et common law" (2004). Cornell Law Faculty Working Papers. Paper 15. Schoenbaum, T. J. 1998. The Duty of Utmost Good Faith in Marine Insurance Law: A Comperative Analysis of American and English Law. Journal of Maritime Law and Commerce Vol. 29, No. 1, pp. 1-39. Solomon, R. C. 1972. From rationalism to existentialism: the existentialists and their nineteenth- century backgrounds. New York: Rowman & Little field. Read More