Australia: High Court Comments On The Duty Of Utmost Good Faith In Insurance Contracts

Last Updated: 4 April 2008
Article by Kathy McCarthy and Peter Swingler

This is a decision of the High Court which considers, among other things, the construction of insurance policies, estoppel and the requirement to act with utmost good faith in s13 of the Insurance Contracts Act 1984 (Cth).


  • The respondent, AMP Financial Planning Pty Ltd ("AMP"), carried on business as a licensed securities dealer under a licence granted on 27 August 1991 pursuant to s784 of the Corporations Law ("the Corporations Law").
  • AMP had issued authorities to Mr Ashok Pal ("Pal") and Mr Anthony Howarth ("Howarth") as "securities representatives" of AMP for the purposes of Ch 7 of the Corporations Law. Pal and Howarth conducted a financial advisory business through a company which they controlled, Macquarie Advisory Group Pty Ltd ("MAG"). Each of them held a proper authority from AMP. At various times they also held proper authorities from Hillross Pty Ltd ("Hillross"), a related company of AMP.
  • In May 1999, officers of Hillross discovered that Pal and Howarth had traded outside their proper authorities with Hillross. This discovery caused Hillross to notify the Australian Securities and Investments Commission ("ASIC") of possible breaches of the Corporations Law. At the same time, Hillross terminated the respective proper authorities of Pal and Howarth.
  • Under s 826(1)(j) of the Corporations Law, a licence may be revoked by ASIC, if, relevantly, ASIC has reason to believe that a holder "has not performed [its duties] efficiently, honestly and fairly ... as the case requires".
  • Following an investigation, ASIC obtained an order for the winding up of MAG and orders banning Pal and Howarth and MAG from the securities industry. These steps were followed by the compulsory examination of Pal and Howarth and officers of a company ("Hibiscus Spa") in which it was suspected that approximately $3.4 million of investor funds had been invested and lost. In December 1999, MAG was placed into liquidation.
  • For its own commercial reasons (including the need to protect its relations with ASIC, its licence and its goodwill) AMP adopted a protocol ("the protocol") for dealing with investors which was designed to ensure, as far as possible, that claims for civil liability, within the meaning of the insurance policies, were not made. CGU subsequently gave its 'in principle' support to the protocol.
  • AMP considered 63 investor claims under the protocol and through its solicitors it reached settlements with 47 of the investors. It paid those investors amounts totaling $3.23 million ("the settlement amounts").
  • At the relevant times, AMP had professional risk insurance contracts ("the insurance policies") in place with CGU.
  • Throughout the period when AMP reached the settlements with the investors, CGU had not advised AMP that it would provide indemnity in relation to the insurance policies. During this time, CGU was advising AMP to act like a prudent uninsured. Importantly, it took over two years for CGU to deny indemnity to AMP.
  • AMP claimed that it was entitled to be indemnified by CGU under the insurance policies in relation to the settlement amounts.

Right to Indemnity

  • The High Court held that AMP had not established a right to indemnity from CGU under the insurance policies in relation to the settlement amounts for a number of reasons.
  • Firstly, payment of the settlement amounts was not within the terms of the cover provided by the insurance policies. None of the investors to whom the settlement amounts were paid made a claim, as defined. In the events that occurred, there were no claims for civil liability within the meaning of the insurance policies.
  • Secondly, at the time it paid the settlement amounts, AMP was concerned not to put CGU in a position where it might decide to exercise its contractual right to take over and defend any claim in the name of AMP.
  • Thirdly, most of the settlement amounts were paid during October and November 2001, and all settlement amounts were paid at a time when it was plain to AMP that CGU was not committing itself to accepting liability to indemnify AMP.


  • The High Court found that AMP's claim of an estoppel at trial hinged on the protocol.
  • The Court held that AMP's appeal to the Full Court should have been dismissed. It said that the questions remitted by the Full Court had not been litigated at trial and were not open on appeal.
  • The High Court held that before the trial judge, AMP did not set out to establish that it was legally liable to the investors. Rather, it set out to demonstrate the process it followed in settling the claims.
  • The Court confirmed the trial judge's findings that AMP did not enter into the settlements in reliance on any commitment or promise or representation by CGU. It found that the evidence did not support a representation by CGU, at the time the settlement amounts were paid, that it would not put AMP to legal proof of its liability to investors.
  • The High Court also found that the trial judge was correct to find that AMP had suffered no relevant detriment, as it did not alter its position on the basis of any assumption or belief induced by the conduct of CGU.
  • The Court referred to CGU's opportunism and lack of diligence, but found that AMP's decision to pay the settlement amounts as and when it did were made for its own reasons and in its own interests.

Utmost good faith

  • Part II of the Insurance Contracts Act 1984 ("the Insurance Act") imposes upon both parties to a contract of insurance a duty of utmost good faith. Section 12 of the Insurance Act provides that the provisions of Pt II may not be read down and s13 that parties may not rely on the terms of a contract of insurance except in the utmost good faith. Section 13 provides as follows:

"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."

  • For its own sound commercial reasons (including the need to protect its relations with ASIC, its licence and its goodwill), AMP adopted the protocol for dealing with investors which was designed to ensure, as far as possible, that claims for civil liability, within the meaning of the insurance policies, were not made. The High Court had difficulties with the idea that good faith requires an insurer to inform the insured, before the insured event has occurred, whether the insurer will accept liability if and when it occurs.
  • The High Court held that a lack of utmost good faith is not to be equated with dishonesty only. The Court suggested that the sort of conduct that might constitute an absence of utmost good faith may have elements in common with an absence of clean hands according to equitable doctrine which requires that a plaintiff seeking relief not himself be guilty of tainted relevant conduct.
  • The Court referred to the doctrine of clean hands because, as with another equitable doctrine, that he who seeks equity must do equity, it invokes notions of reciprocity which the Court believed were of relevance in this case.
  • The Court made it clear that conduct falling short of actual impropriety might not constitute an absence of utmost good faith of the kind which the Insurance Act demands. It suggested that something less than that might well do so.
  • The Court said that utmost good faith will usually require something more than passivity and will usually require affirmative or positive action on the part of a person owing a duty of it.
  • It was accepted that utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own. However, the High Court did not believe that it was necessary for the purposes of this case, to attempt any comprehensive definition of the duty, or to canvass the ranges of conduct which might fall within, or outside s13 of the Insurance Act.
  • The High Court found that the conduct of CGU did leave something to be desired. The Court said that there was certainly a degree of opportunism on the part of the CGU in dealing with the claims against AMP by the investors. The Court believed that it ought to have been within the contemplation of CGU that AMP might come under pressure from ASIC to settle claims.
  • The Court held that the fact that CGU may have wished to see some further documents, in order to explore in more detail some of the investors' claims, that it thought that there might be a good defence under s 819(4) of the Corporations Law, that it wished to obtain its own senior counsel's opinion, and that it changed its solicitors several times, could not fully justify or explain the long delay that occurred before it denied liability. The Court said that if the long delay on the part of CGU had been the only issue in the case, it may have been inclined to hold that CGU did fail in its duty of utmost good faith.
  • While making no finding in relation to whether there had been an absence of good faith on the part of CGU, the Court held that AMP's determination to settle the investors' claims quickly for its own reasons meant that there was not such a degree of reciprocal good faith on the part of AMP as would entitle it to relief against CGU.
  • AMP failed in its claim that CGU breached its duty of utmost good faith.


  • The High Court has made it clear that it will closely examine the actions of insurers to determine whether there has been a breach of the duty of utmost good faith.
  • The Court has also made it clear that the duty of utmost good faith is not to be equated with dishonestly only and that something less than actual impropriety may be sufficient to breach the duty.
  • However, utmost good faith will often require something more than passivity and will usually require affirmative or positive action.
  • In the wake of this decision, it would be prudent for insurers to consider the interests of an insured as well as their own.
  • Insurers should also seek to resolve indemnity issues with an insured in a timely manner.

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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