Good faith and third parties

Australian law implies into insurance contracts a bilateral term of utmost good faith. Section 13 of the Insurance Contracts Act 1984 (ICA) provides: ‘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.’ English law has not yet reached this stage, but is arguably moving in that direction with decisions which require insurers to act appropriately in the claims-handling process. Section 48 of the ICA extends, to any person to whom the insurance cover applies, a right to recover directly from the insurers, a position replicated in England under the Contracts (Rights of Third Parties) Act 1999. Section 48(3) of the ICA is of particular significance in imposing upon the third party beneficiary an obligation of utmost good faith towards the insurers. The question which has been discussed in a series of recent cases in Australia is the extent to which insurers may owe a duty of good faith even beyond third party beneficiaries, a matter which will inevitably fall to be determined in England in due course. The decisions also consider the content of the obligation of utmost good faith upon insurers, in an analysis of broader relevance to this developing area of English law. The issues are discussed by Samantha Traves of the Faculty of Law, Queensland University of Technology.