Duty of Utmost Good Faith: What Your Insurer Owes You

The duty of utmost good faith is a legal obligation under Section 13 of the Insurance Contracts Act 1984 that requires both you and your insurer to act honestly and fairly. For insurers, this means they cannot rely on technicalities to deny valid claims, must handle claims promptly, and cannot make unreasonable requests for information. If your insurer breaches this duty, it strengthens your position in a dispute at AFCA.

Key takeaways

• The duty of utmost good faith is a legal obligation under Section 13 of the Insurance Contracts Act 1984.
• Insurers cannot rely on technicalities to deny valid claims and must handle claims promptly and fairly.
• A breach of the duty strengthens your position at AFCA and can be cited in your dispute letter.
• The duty applies to both parties. Be honest and transparent in your own dealings with the insurer.

When you took out your insurance policy, you entered into more than a simple contract. Under Australian law, both you and your insurer are bound by a duty that sits above the fine print of your Product Disclosure Statement (PDS). It is called the duty of utmost good faith, and it is one of the most powerful protections available to you as a policyholder.

What is the duty of utmost good faith?

Section 13 of the Insurance Contracts Act 1984 (Cth) states that a contract of insurance is a contract based on the utmost good faith. This means both parties, the insurer and the insured, must act toward each other with honesty, fairness and transparency. The duty is implied into every insurance contract by law. Your insurer cannot contract out of it, and no clause in your PDS can override it.

This is not just a vague principle. Section 14 of the Act makes it clear that if an insurer fails to act with utmost good faith, they cannot rely on the contract to the extent that doing so would be unfair to the policyholder. In practical terms, this means your insurer cannot hide behind policy wording to produce an outcome that is plainly unjust.

What your insurer owes you under this duty

The duty of utmost good faith requires your insurer to do far more than simply follow the letter of the policy. It imposes obligations that go to the spirit of fair dealing. Here is what that looks like in practice.

Honest and fair assessment of your claim

Your insurer must assess your claim on its merits. They should consider the evidence you have provided, conduct their own reasonable investigation, and arrive at a decision that is genuinely fair. They cannot approach your claim looking for reasons to decline it. The General Insurance Code of Practice reinforces this, requiring insurers to handle claims honestly, fairly, transparently and in a timely manner.

Not relying on technical loopholes

An insurer breaches its duty of utmost good faith when it relies on a narrow or technical reading of the policy to deny a claim that would otherwise be covered. For example, if a policy exclusion is ambiguous and could be read two ways, the insurer should not simply adopt the interpretation that favours them. Courts and the Australian Financial Complaints Authority (AFCA) have consistently held that ambiguities in policy wording should be resolved in favour of the insured.

Transparent communication

Your insurer must keep you informed throughout the claims process. This means providing clear reasons for any decision, explaining what information they need from you, and updating you on the progress of your claim. Under the General Insurance Code of Practice, insurers must inform you of their decision within specific timeframes and give you clear written reasons if they decline your claim or do not pay the full amount.

Adequate and fair investigation

Before making a decision on your claim, your insurer must conduct a proper investigation. This means gathering relevant evidence, considering all the facts, and not making assumptions. An insurer that declines a claim without adequate investigation, or that cherry-picks evidence to support a denial, is likely breaching its duty of good faith.

Common examples of good faith breaches

Understanding the duty in theory is one thing. Recognising when your insurer has breached it is another. Here are some of the most common ways insurers fall short.

• Unreasonable delays in handling your claim. Under the Code of Practice, insurers should make a decision within four months of receiving a claim (or ten business days for straightforward claims). If your insurer is dragging their feet without a valid explanation, or requesting the same information multiple times, this can amount to a breach of good faith.
• Relying on exclusions that do not fairly apply. Some insurers decline claims by pointing to an exclusion that, on a fair reading, was never intended to cover the situation. For instance, declining a storm damage claim by relying on a "gradual deterioration" exclusion when the damage was clearly caused by a single weather event. The duty of utmost good faith prevents insurers from stretching exclusions beyond their reasonable meaning.
• Failing to consider all relevant evidence. If your insurer relies on a single expert report while ignoring other evidence that supports your claim, or if they fail to obtain their own evidence before declining, they may be acting in bad faith. A fair assessment requires considering the full picture.
• Making lowball settlement offers. An insurer that offers to settle a claim for significantly less than its fair value, hoping the policyholder will accept out of frustration or financial pressure, is not acting with utmost good faith. You are entitled to be indemnified for the actual loss covered by your policy.
• Failing to provide clear reasons for a decision. If your insurer declines your claim or reduces the payout, they must explain exactly why. Vague or formulaic responses that do not address the specific facts of your claim can indicate a breach of the duty.

How AFCA considers utmost good faith

The Australian Financial Complaints Authority (AFCA) is the external dispute resolution body for insurance complaints. When AFCA reviews a dispute, the duty of utmost good faith is central to its analysis. AFCA does not simply check whether the insurer followed the policy wording to the letter. It asks whether the insurer acted fairly and reasonably in all the circumstances.

In its determinations, AFCA regularly considers whether the insurer conducted an adequate investigation, whether they communicated transparently, whether they relied on policy terms in a way that produced an unfair outcome, and whether they handled the claim within reasonable timeframes. AFCA has the power to require an insurer to pay a claim, increase a settlement, or provide compensation for the distress caused by poor handling.

Importantly, AFCA can look beyond the strict terms of the policy. Even where the policy wording might technically support the insurer's position, AFCA can find in favour of the policyholder if the insurer's conduct was inconsistent with good faith. This is a critical distinction. The duty of utmost good faith is not just about what the policy says. It is about how the insurer behaves.

The duty goes beyond your PDS

Many policyholders assume that the PDS is the final word on their rights. It is not. The duty of utmost good faith exists independently of the policy terms. It is a statutory obligation under the Insurance Contracts Act, and it applies to every aspect of the insurance relationship, from the sale of the policy through to the handling and settlement of claims.

This means that even if your insurer points to a specific clause in the PDS to justify their decision, you can still challenge that decision if the insurer has not acted fairly. For example, Section 54 of the Insurance Contracts Act prevents an insurer from refusing a claim based on an act or omission by the insured that did not cause or contribute to the loss. Combined with the duty of utmost good faith, this creates a robust framework for holding insurers accountable.

What you can do if your insurer is not acting in good faith

If you believe your insurer has breached their duty of utmost good faith, there are steps you can take to protect your interests.

1. Document everything. Keep records of all communications with your insurer, including dates, times, and the content of conversations. Save copies of every letter, email and text message.
2. Lodge an internal complaint. Before escalating to AFCA, you must first raise a formal complaint with your insurer through their Internal Dispute Resolution (IDR) process. The insurer has 30 calendar days to respond.
3. Escalate to AFCA. If your insurer does not resolve your complaint through IDR, or if you are not satisfied with their response, you can lodge a complaint with AFCA. There is no cost to you for using AFCA's services.
4. Reference the duty specifically. When preparing your dispute documents, explicitly refer to Section 13 of the Insurance Contracts Act and the duty of utmost good faith. Explain how your insurer's conduct fell short of this standard with reference to specific facts and evidence.

How The Fair Claims Co can help

Preparing a strong dispute submission requires more than describing what happened. It means framing your case around the legal obligations your insurer has failed to meet, including the duty of utmost good faith. The Fair Claims Co specialises in preparing insurance dispute documents and AFCA submissions that clearly set out how your insurer's conduct has fallen short. We help you present the right evidence, reference the right legislation, and make a compelling case for a fair outcome.

If your insurer is not treating you fairly, you do not have to navigate the process alone. Get in touch with us to find out how we can help you hold your insurer to the standard the law requires.