Federal Court: No breach of 'utmost good faith' duty in insurance dispute

An insurance provider rejected a claim based on non-disclosure of mental health history

Federal Court: No breach of 'utmost good faith' duty in insurance dispute

The Federal Court has ruled that Zurich Australia Limited did not violate its duty of utmost good faith in an insurance dispute that centred around the avoidance of an income protection policy.

The dispute in Australian Securities and Investments Commission v Zurich Australia Limited (No 2) [2023] FCA 1641 arose when OnePath Life Limited, the previous owner of Zurich's life insurance business, rejected a claim based on the insured's failure to disclose a history of hospitalization for serious mental health issues.

The policy was issued in June 2016, and events relating to the handling of the claim and the eventual avoidance of the policy for fraudulent non-disclosure occurred between 2018 and 2020. OnePath, a wholly owned ANZ Banking Group Ltd subsidiary, was acquired by Zurich in 2019. OnePath's life insurance business, including any liability about the claims of the Australian Securities and Investments Commission (ASIC), was transferred to Zurich.

In 2018, OnePath rejected the income protection claim of a customer who suffered a shoulder injury while working as a nurse. OnePath contended that the customer's failure to disclose prior hospital admissions for unrelated mental health issues between 1999 and 2005 constituted fraudulent non-disclosure. ASIC argued that Zurich, which replaced OnePath in the proceedings, breached its duty of utmost good faith by avoiding the policy without making proper inquiries, inadequately notifying the customer, and failing to inform the customer of her dispute or appeal rights.

Despite ASIC's assertions, the Federal Court ruled against ASIC on all counts, stating that Zurich did not breach its duty of good faith. The court highlighted that Zurich had reasonably concluded that the insured's non-disclosure was fraudulent based on clear questions in the application form regarding mental health history. The court deemed Zurich's rejection of the insured's explanation as reasonable and rejected ASIC's claim that OnePath breached its duty of good faith by avoiding the insured's cover without embarking on further inquiries.

The court also dismissed ASIC's criticism of the promptness with which Zurich decided to avoid the insured's policy, emphasising the insurer's right to act promptly and the duty to make expeditious decisions as part of the duty of utmost good faith.

Ultimately, the court rejected ASIC's claims that Zurich breached its duty of good faith, affirming Zurich's reasonable conclusion in avoiding the insured's policy based on the circumstances and information available.

ASIC said it is currently reviewing the court's decision, emphasising the particular importance of this case as it is the first instance where ASIC sought a civil penalty for a breach of s. 13 of the Insurance Contracts Act 1984 (Cth), which mandates insurers to act with utmost good faith.

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