Q: What does acting in good faith mean?

A: Each party to the insurance contract – the policyholder, the insurer and a third party beneficiary (a person who is entitled to the benefits of the insurance policy) – must act with fairness, decency and fair dealing as well as honesty in their dealings with one another. An example of this would be an insured policyholder’s obligation to make full disclosure of all relevant facts when taking out the insurance in line with their duty of disclosure. An example for an insurer would be to respond to a claim made under a policy in a timely fashion.

The duty of utmost good faith is central to and regulates all aspects of the contract of insurance, from inception through to the terms of the contract, to each party’s responsibilities in the event of a claim under the contract of insurance. One of the reasons why the duty of utmost good faith was developed under the common law is because often information of vital importance to the insurance contract is only known to one party, for example, an existing structural defect in a building for which the owner occupier wants to purchase home insurance. Under this duty the party possessing the knowledge must disclose all material and relevant facts to the other party to the contract so that the other party can make an accurate assessment of what they are undertaking.

The duty of utmost good faith is now an implied statutory term inserted into every general insurance contract in Australia under section 13 of the Insurance Contracts Act 1984. Section 13 requires both the insurer and the insured to act towards the other, in respect of any matter arising under or in relation to it, with the utmost good faith. Therefore, like the common law, the duty spans from the pre-contractual stage (duty of disclosure) to the post-contractual stage (the making and handling of claims). In addition, being a contractual term, damages are allowed to the innocent party in case of a breach.

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