Insurance Contracts CP - Law Reform Commission

9.46 The privity doctrine confines the duty of utmost good faith to contracting parties.
Notwithstanding this, the current position in English law indicates that damages for breach of this duty by
an insurer does not entitle the insured to damages for any loss suffered as a result of this breach of
contract – Banque Financiere v Westgate Insurance Co. 60 Ipso facto, where there is no duty, as is
arguably the case in relation to strangers to the contract, there can be no breach of a duty. The pattern
set in Australian litigation is to build upon section 13 of the Insurance Contracts Act 1984, which creates a
post formation duty of utmost good faith, breach of the duty being actionable in damages. In Ireland and
England and Wales, the law in relation to the post contractual duty of utmost good faith is less fully
developed than elsewhere, save in respect of the fact that the England and Wales 1999 statutory privity
reforms may suggest that there are third party rights of a contractual nature, when the contracting parties
so desire. But the question whether a third party may have an effective remedy to enforce a promise may
become a more controversial question should the (contractual) duty become available to third parties or
independently actionable in tort or under statute. Irish law is silent on post contractual good faith as a
general principle.
9.47 The Australian 1984 legislation, by recognising the duty of utmost good faith as an implied term
in the contract of insurance, clearly limits the implied term to the contractual context within which it
operates. However, the proposal to extend the duty of utmost good faith to third parties, by way of an
amendment to section 13 does not mean that a full range of contractual remedies will become available
to third parties. The proposed amendment to section 13 will allow the regulator to intervene on behalf of
third party beneficiaries and while the Bill does seek to improve information access rights under section
41 of the 1984 Act for third parties, there will be no expansion of damages remedies for third party
beneficiaries. The Commission are of the view that it is best to maintain the present position whereby
third parties cannot rely on a duty of utmost good faith. If, in contrast, the duty to act in utmost good faith
is actionable in tort, as it is in the United States, a number of consequences follow hard upon. For
example, if the tort is to be regarded as being closely related to fraud or deceit, there would be an
argument for applying not only the very generous tort rules in relation to foreseeability but also the rules
applicable to remoteness of damage for fraudulent misrepresentation. The Law Commissions, in their
Good Faith Issues Paper 6, point to the fact that the vast majority of US States allow for the award of
punitive damages often even in third party claims cases. 61
9.48 If a decision is taken to extend the duty of utmost good faith, as an implied term, for instance,
into the contract of insurance, the implied term would presumable only be broken as between the policy
holder and the insurer. This appears to be the existing situation in Australia. Post contract breach of the
duty by an insurer is most likely to arise in relation to bad faith processing of a claim or a failure to warn or
advise an insured. The Commission do not recommend that third party beneficiaries should be able to
invoke good faith obligations which should be owed only to contracting parties.
9.49 It should be noted that Irish law, by way of the provisions in sections 7 and 8 of the Married
Women‟s Status Act 1957 already permits recovery of damages in a limited range of circumstances that
can include consumer insurance contracts within a family context and that the proposed reforms in the
2008 Report will provide a mechanism for third party recovery.
9.50 Should a decision be taken against allowing a third party to be able to invoke a contractual duty
of utmost good faith, by way of an exception to the privity of contract doctrine, the question may arise
whether such a duty should arise in tort. While the Commission does not wish to inhibit the development
of the law of negligence, or indeed any other tortious liability on a case by case basis, there appears to be
no strong argument favouring the expansion of tort law. The Law Commissions, in their Issues Paper 6,
were against developing the duty of good faith by holding it to be actionable as a separate tort or deficit
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[1990] 2 All ER 947. See Eggers Picken and Foss, Good Faith in Insurance Contracts (2010) (3rd Edition)
paras 16.95 to 16.135.
Damages for Late Payment (March 2010), Chapter 7. Third party claims cases involve actions brought
directly against the insurer of persons other than the insured, often on state laws involving strict liability, bad
faith, or negligence: see (2004) Tort Trial and Insurance Practice Law Journal 39(4); (2010) Tort Trial and
Insurance Practice Law Journal 46(2).
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