12/04/2023·2 mins to read

The mutual duty to act in utmost good faith

With the High Court’s recent judgment about the insured’s duty to disclose material information to their insurer, we think it is a good time to highlight that, under an insurance contract, both an insured and an insurer are under a duty to act in utmost good faith.

In Maqbool v Tower Insurance Ltd [2023] NZHC 632, the High Court held that Tower was entitled to avoid the policy based on the insureds’ non-disclosure of material facts.

The insureds’ rental property suffered significant damage after a fire in October 2013 and they lodged a claim with Tower. However, Tower found out that in 2010 they allowed tenants to alter the property by dividing it into two self-contained units with their own kitchens. The work was carried out without the required building and resource consents. In March 2014, Tower decided to avoid the insureds’ policy for their failure to disclose the alterations made to the property. Tower says if it had been informed of this material change of circumstances, it would not have agreed to insure the property due to the increased risks of liability.

The relevant policy wording included a requirement that the insured tell Tower “everything you know, or could reasonably be expected to know, that may influence our decision to insure you.” An example given, was structural alterations to the house. The insured were also warned that, “If any circumstances change or may change during the time we provide your insurance you must tell us.”

The High Court decided that:

  • The nature of property was fundamentally altered by the alterations.

  • The alterations resulted in material change of circumstances that potentially affected the level of risk Tower would be required to assume under the policy. The increased risks included that:
  • EQC would only accept one claim in the event of a natural disaster as the property was operating as two units.
  • The alterations may not meet the Building Code.
  • The additional kitchen and lack of adequate fire protection meant there was an increased risk of fire.

The High Court considered these factors were relevant to Tower in its assessment of the risks it would be assuming under the policy and therefore, the insureds should have disclosed the alterations made to Tower at the very latest in 2011 when the policy was next renewed.

This judgement has demonstrated the long-established common law principle that the insured has a duty to act with the utmost good faith and honesty in dealing with the insurer and the duty requires the insured to disclose all material facts to the insurer. Often, this duty of disclosure is incorporated into the policy wording.

It is equally important to remember that insurance is a contract of utmost good faith and the duty also applies to the insurers. In Young v Tower Insurance Ltd [2016] NZHC 2956, Tower was held to have breached the duty by failing to disclose an earlier material report to the insured. The High Court held that a mutual duty of good faith is implied in every insurance contract. Damages may be awarded for breach of that duty. The court considered that how an insurer handles a claim is relevant to the decision on whether the insurer has breached the duty. It held that an insurer is at least required to:

  • Disclose all material information.

  • Act reasonably, fairly and transparently. 

  • Process the claim in reasonable time under the circumstances.

Our insurance team is highly experienced in advising both the insured and the insurer. If you have questions on how to handle a claim or how your claim has been handled, please contact one of our insurance experts.

Special thanks to Jennifer Liu for her assistance in writing this article.



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