How Smart: Court Confines the Statutory Duty of Utmost Good Faith

Introduction

In Smart v Westpac Banking Corporation [2011] FCA 829, Jagot J of the Federal Court considered whether the statutory duty of utmost good faith in section 13 of the Insurance Contracts Act 1984 (Cth) (ICA) extended to an "insured person" under a directors & officers policy where that person was not a party to the insurance contract. The decision affirmed the decisions in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd (2009) 240 CLR 391 (Zurich) and Hannover Life Re of Australasia Ltd v Sayseng [2005] 13 ANZ Ins Cas 90-123 that the statutory duty does not extend to persons who are not parties to the contract.

This is presently good news for insurers as it confines the class of persons who are legally entitled to bring claims for damages for breach of the statutory duty strictly to the parties to the contract (and should therefore contain potential litigation costs). However, it is worth noting that if the proposed amendments to section 13 of the ICA are enacted, the duty is unlikely to be so confined.

Facts

Mr...