Court rejects statutory duty of utmost good faith

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Dina Chase
6 years ago
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1 Court rejects statutory duty of utmost good faith Overview The recent decision of the Supreme Court of Queensland in Matton Developments Pty Ltd v CGU Insurance Limited (No 2) 1 provides useful guidance as to: the meaning of the phrase accidental, sudden and unforeseen ; the practical application of principles of policy construction including: o o the requirements that provisions be interpreted in the context of the policy as a whole and having regard to the commercial objectives which the policy is designed to achieve; the interaction between extensions and exclusions particularly where the application of particular exclusions to an extension may render the cover provided by the extension illusory; the operation of Section 54 of the Act in the context of acts of the insured which are capable of causing or contributing to the loss the subject of the claim; the operation and extent of the duty of utmost good faith in the context of claims handling. In relation to the duty of utmost good faith, the decision confirms that section 13 of the ICA gives rise to an implied term within the contract of insurance and as such, a breach of that duty only gives rise to damages for breach of contract. It does not give rise to any tortious or statutory duty. Background and factual findings Matton took out a Contractors & Plant Insurance policy with CGU in respect of a Liebherr LTR1100 Telescopic Crawler Crane (Crane). In January 2009, the Crane s boom collapsed resulting in a total loss of the Crane. At the time of the collapse the Crane was on hire to a third party and being operated under contract by a company related to Matton. Matton made a claim on the Policy alleging that the failure of the Crane was accidental, sudden and unforeseen and that: at the time of the incident the Crane was beyond operated on level, or near level, ground; the collapse was caused by the failure of the heel weld joints as a result of a preexisting defect. 1 [2015] QSC 752

2 CGU denied indemnity. It alleged that the Crane collapsed due to structural overload as a consequence of a side load induced by the Crane operating on a 7 degree slope. It was agreed that the land on which the Crane came to rest had a 7 degree slope. However, Matton contended that the Crane had been operating in a level position but was inadvertently driven forward by the Crane operator. After consideration of a considerable amount of lay and expert evidence, Flanagan J made factual findings as to the cause of the collapse, including that: at the time of the collapse the Crane had been operating on a 7 degree angle; such operation did not comply with the manufacturer s guidelines or Australian Standards; such operation caused the collapse of the Crane. Did the claim fall within the insuring clauses? The Court then turned to consider whether, on the proper construction of the Policy, the claim fell within the cover provided by the main insuring clauses, additional covers and optional extensions. The Court s reasoning provides a very useful overview and refinement of established principles relevant to the interpretation of policies generally and key terms commonly found insuring clauses within property insurance policies. These sections of the decision are worth close consideration for his Honour s detailed overview of prior authority. In the context of the particular Policy, the Court held that: 1. Was the damage caused by the collapse accidental, sudden and unforeseen Whether the collapse was accidental, sudden and unforeseen must be assessed from the point of the view of the crane operator applying a subjective test with objective qualifications. The object qualifications are that: where an assured gambles or courts a risk or takes a calculated risk with knowledge of its outcome, that is a deliberate acceptance of that risk; or where an assured voluntarily embarks on a foolhardy venture from which the loss or damage that resulted was the almost inevitable consequence. Applying the above test, the collapse of the Crane was not accidental, sudden and unforeseen because the operator of the Crane proceeded to embark on a dangerous course despite appreciating the risk and continued on that course even after the extent of the risk had become apparent. 2. Did the damage to the Crane occur while the Crane was located and in use in the manner in which it was designed to be used. Even if the damage was accidental, Matton would not be entitled to cover because the accidental damage to the Crane did not occur while the Crane was located and in use in the manner in which it was designed to be used.

3 3. Did the Additional Cover for Accidental Overload operate to provide cover? The Policy provided Additional Cover for Accidental Overload being accidental sudden and unforeseen physical loss of or damage to a machine caused by or resulting from accidental overloading which is non-deliberate and clearly unintentional. The additional cover did not apply because: the damage was not accidental, sudden and unforeseen (see findings 1 above); and on its proper interpretation the term overload refers to a situation where the Crane is physically overloaded with an excessive load when the Crane is first loaded (such as where the load is 45 tonnes instead of 40 tonnes). It does not refer to a situation where the operation of the Crane on a slope creates a structural overload. 4. Did the Optional Extension for Dry Hire operate to provide cover? The Crane was not on Dry Hire at the time of the incidents because the agreement between Matton and its customer required Matton to provide both the Crane and the operator. The fact that the operator supplied by Matton was employed by a related company and not by Matton itself was not relevant to the operation of the extension. Did the Exclusions apply? The Court held, based on the factual findings above, that, in the event that the insuring clause had been triggered, the claim would have been excluded because: the insured damage occurred while the Crane was being used in a manner other than that for which it was designed (Clause 21) at the time of the collapse of the boom the Crane was not being used in compliance with the relevant Australian Standards (Clause 26(d)) at the time of the collapse of the boom the Crane was being operated contrary to the manufacturer s guidelines (Clause 27). Section 54 It was accepted that the effect of each of the above exclusions was such that Section 54(2) of the Insurance Contracts Act 1984 (Cth) would apply. As such, in the event that Matton was able to prove that no part of the loss was caused by the acts constituting a breach of the exclusions (s54(3)) or that some part of the loss was not caused by those acts (s54(4)), then the CGU would not be able to refuse to pay the claim (or some part of it) by reason only of the application of the exclusions. The Court held that, given its factual findings, Matton had failed to discharge its onus of proof. Duty of Utmost Good Faith Matton also alleged that CGU was in breach of section 13 of the Insurance Contracts Act 1984 (Cth) (ICA), which deals with the duty of utmost good faith.

4 Specifically, Matton alleged that: As the duty of utmost good faith was an implied term into the policy of insurance, Matton alleged that as a result of CGU s breach of that duty, it was entitled to damages for breach of contract (Breach of Contract Claim). Section 13 of the ICA created a concurrent statutory duty on CGU and as a result of CGU s breach, Matton alleged that it was entitled to damages in tort (Breach of Alleged Statutory Duty Claim). Matton relied on the wording of section 13(2) of the ICA, which provided that a breach of section 13(1) is a breach of the ICA. The Court held that CGU s decision to deny indemnity under the policy did not breach section 13 of the ICA. The Court reviewed various well established principles that identified an insurer is entitled to a reasonable period of time to make inquiries of the insured and circumstances of the claim and to come to a position on indemnity. The Court reiterated the principle that an insurer s decision to deny indemnity does not, by default, cause that insurer to be in breach of section 13 of the ICA. In dealing with the Breach of Alleged Statutory Duty Claim, the Court had to first consider whether section 13 of the ICA gives rise to a statutory duty. CGU made the following submissions regarding section 13 of the ICA: The section was solely implemented to remedy breach of contractual terms and is not a standalone provision that gives rise to a statutory duty. This was evident through the decision of Australian Courts to reject the implementation of a tort of bad faith, which exists in the US and other jurisdictions. As such, there were no other causes of action available to increase the contractual remedies otherwise available for a breach of section 13 of the ICA. The Court held that a breach of the duty of utmost good faith only gives rise to contractual damages and no concurrent tortious or statutory duty arises. 2 This reflects with the purpose behind the enactment of section 13 of the ICA, namely to fill a significant gap in the prior common law by requiring that both the insured and insurer conduct themselves with utmost good faith in all their contractual dealings and providing the insured with an effective contractual remedy in the event of a breach of that duty by the insurer. The Court held that the mere implication of a term into a contract of insurance by statute does not, in itself, give rise to a statutory duty - more is required. An action for breach of statutory duty might be more readily inferred if there was no alternative cause of action available. 3 In coming to its decision, the Court indicated that section 13(2) of the ICA, which was introduced as part of the 2013 amendments to the Act 4, did not support the existence of a statutory duty. The intention of those amendments was to provide regulatory sanctions for a contravention of the duty and to allow ASIC to provide assistance to affected insureds in seeking contractual remedies. 2 Ibid at [268] per Flanagan J. 3 Ibid at [263] per Flanagan J. 4 Insurance Contracts Amendment Act 2013 (Cth)

Specifically, the Court considered whether, having regard to the claims handling process, CGU had breached the duty (as Matton asserted) by selectively relying on information which would allow the

5 Flanagan J proceeded to determine whether the contractual duty of utmost good faith had been breached. In doing so his Honour provides a useful overview of the relevant authorities on breach of duty of utmost good faith. Specifically, the Court considered whether, having regard to the claims handling process, CGU had breached the duty (as Matton asserted) by selectively relying on information which would allow the insurer to decline cover and improperly disregarding evidence which might lead to the opposite conclusion. After reviewing the evidence of CGU s claims officer Flanagan J, concluded: I found [CGU s claims manager] to be an impressive witness. He was an experienced claims manager who gave detailed consideration to the claim. The detailed consideration included the appointment of loss adjusters and assessors, receiving reports from engineering and metallurgist experts and giving consideration to the eye witness accounts. I accept the defendant s submission that the decision to decline was one which evolved and was made after careful consideration of the available evidence including the lay evidence. His Honour held that CGU had not breached its duty of utmost good faith and reiterated the pre-existing authority that an insurer, acting in good faith, is perfectly entitled to deny indemnity where it has bona fide reservations concerning its obligations to indemnify the insured 5. Indeed, Flanagan J noted that the assessments made by CGU s claims manager and assessors had been shown to be correct by the Court s findings on those issues. What does this mean for insurers? The decision is important as it is the first time that the courts have considered the issue since the 2013 amendments which introduces the new sub-section 13(2) (which some commentators had speculated might be used by the courts to imply a new statutory or tortious duty of good faith). That argument has been firmly and persuasively rejected. The result is of practical importance in that the characterisation of damages for breach of contract is conceptually narrower than the damages available for breach of a tortious duty. Specifically, damages for breach of contract are characterised as losses that are reasonably contemplated by the parties to the contract. Damages recoverable in tort claims are potentially wider as they encompass all losses that are held to be reasonably foreseeable. As such, an insurer s liability for breach of the duty of utmost good faith in the context of claims handling leading to a denial of indemnity would require the insured to prove its entitlement to indemnity under the policy. The duty does not provide a basis whereby, independent of that contractual entitlement, the court could order that the insurer indemnify the insured as a form of punitive sanction for not acting in good faith. This case summary was drafted by Andrew Sharpe and Ahrani Ranjitkumar. For enquiries, please contact: Andrew Sharpe Principal e: a.sharpe@mccabes.com.au t: Ahrani Ranjitkumar Associate e: a.ranjitkumar@mccabes.com.au t: CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007)235 CLR 1, per Kirby J at [72]

Proportionate liability and a case on denial of indemnity

Proportionate liability and a case on denial of indemnity JANUARY 2005 INSURANCE & REINSURANCE www.aar.com.au Inside: Proportionate liability provisions have now commenced in a number of Australian jurisdictions and their practical effects will be of great interest