In Smart v Westpac Banking Corporation
 FCA 829, Jagot J of the Federal Court considered whether the
statutory duty of utmost good faith in section 13 of the
Insurance Contracts Act 1984 (Cth)
(ICA) extended to an "insured
person" under a directors & officers policy where
that person was not a party to the insurance contract. The decision
affirmed the decisions in Zurich Australian Insurance
Ltd v Metals & Minerals Insurance Pty Ltd (2009)
240 CLR 391 (Zurich) and Hannover Life
Re of Australasia Ltd v Sayseng  13 ANZ Ins Cas
90-123 that the statutory duty does not extend to persons who are
not parties to the contract.
This is presently good news for insurers as it confines the
class of persons who are legally entitled to bring claims for
damages for breach of the statutory duty strictly to the parties to
the contract (and should therefore contain potential litigation
costs). However, it is worth noting that if the proposed amendments
to section 13 of the ICA are enacted, the duty is unlikely to be so
Mr Fitzgerald was a former officer of Westpac who was joined as
cross-defendant by Westpac to proceedings brought against Westpac
by its former employees. Mr Fitzgerald sought indemnity under
Westpac's D&O policy for his defence costs. He also sought
to bring a second claim against the insurers for breach of section
13 of the ICA, being the implied duty of parties to a contract of
insurance to act towards each other with utmost good faith.
The insurers argued that Mr Fitzgerald should not be granted
leave to plead his section 13 claim on the basis that as a matter
of law Mr Fitzgerald's claim was futile.
There was no dispute that Mr Fitzgerald was an officer of
Westpac and therefore an insured person within the meaning of the
policy. There was also no dispute that insurers had to act towards
Mr Fitzgerald in "utmost good faith" in accordance with
their common law duty to named insureds.
However, if insurers were found to have breached that common law
right, that breach would not have granted Mr Fitzgerald a remedy in
damages. This is because the common law duty does not operate to
imply a term of "utmost good faith" into the insurance
contract in the same manner as section 13 (Khoury v
Government Insurance Office (NSW)  165 CLR
622). In short, in the absence of implied term in the contract,
there is no basis to bring a claim in damages for a breach of the
duty of utmost good faith (merely a right to force an insurer to
act with utmost good faith in accordance with the common law
This meant that in order to be entitled to claim any damages for
breach of contract, Mr Fitzgerald had to argue that section 13
applied to him, despite the fact he was not a party to the
In finding against Mr Fitzgerald, Jagot J affirmed the reasoning
from Zurich saying that:
section 48 does not deem a non-party insured to be a
party to the contract of insurance; and
not being a party to the policy Mr Fitzgerald could not rely
on the provisions of section 13 of the ICA.
Cases on section 13 are rare. Here, the Court's role was
fairly simple - to affirm that the statutory duty of utmost good
faith did not extend beyond the parties to the insurance contract
and consequently did not allow Mr Fitzgerald leave to so argue
(meaning the Court did not need to even consider the conduct of the
However, a proposal put forward in the "Review of the
Insurance Contracts Act 1984, final report on Second Stage:
Provisions Other than Section 54" prepared by Alan
Cameron AM and Ms Nancy Milne AM and adopted in the proposed
amendments to the ICA (still pending) provides third party
beneficiaries access to section 13. It is an amendment which has
attracted some criticism, particularly from insurers who believe it
may result in further disputes and increased legal costs.
If the proposed amendments had applied to this case they would
probably have given Mr Fitzgerald a statutory right against the
insurers for damages (in the same way a party to the contract has a
contractual right for damages implied by operation of statute).
Accordingly, while Mr Fitzgerald could not pursue that claim here,
that position is likely to change in the future if/when the
proposed amendments to the ICA are enacted. Insurers should
therefore be on notice of the likely shift and be comfortable that
they understand the impact that such an amendment presents on the
potential for a further class of persons (third party
beneficiaries) to seek damages for an alleged breach of the duty of
utmost good faith.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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