Smart v Westpac Banking Corporation & Ors [2011] FCA 829 (26 July 2011) - the ramifications of not being a party to the insurance contract

Background

As part of a larger chain of court proceedings, Mr Peter Fitzgerald, a former employee of Westpac, issued a cross-claim against Chubb Insurance Company of Australia Limited and Allianz Australia Limited the insurers of Westpac where he sought indemnity under the contract of directors and officers insurance. He was not a party to the contract of insurance but the cover was extended to him as an officer of Westpac.

Mr Fitzgerald sought to amend his cross claim to allege an entitlement to defence costs and secondly, to allege a claim for damages against insurers for breach of their duty to act towards him in the utmost good faith under section 13 of the Insurance Contracts Act 1984 (Cth) (the Act).

Insurers consented to the amendment concerning the claim to defence costs but opposed the amendment concerning the claim for damages for breach of the statutory duty of good faith.

The basis of the argument by insurers was that section 13 of the Act construed properly and in accordance with the relevant authority, applied only to parties to the contract of insurance and not to Mr Fitzgerald, who was an "insured person" though not a signatory.

Section 13 is in the following terms:

"A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a...