There has been speculation recently on whether breach of good faith could be the basis of a claim against insurers in Christchurch.
The possibility of a funded group legal action has been mooted. In New Zealand, we should be sceptical about the existence of a general duty of good faith1.
Insurance policies are contracts and the normal rules of contractual interpretation apply. Contract law provides remedies for breach. Contractual damages put the wronged party in the position they would have been in had the breach not occurred. The focus is on financial compensation for financial loss. General damages for distress, physical inconvenience and suffering are available, but in New Zealand these have been modest and limited to non-corporate parties.
There is no general contractual duty of good faith, nor any entitlement to damages that go beyond compensation. Why, then, are there calls to recognise a general duty of good faith and extra-contractual damages in relation to insurance contracts?
Insurance contracts are “based upon” good faith. This means that in applying for and negotiating the terms of insurance, parties have a cards on the table approach. Full disclosure enables insurers accurately to evaluate and price a risk. The emphasis in the pre-contract stage is on good faith by the insured.
Following policy inception, good faith has limited relevance. The insured has a good faith duty to act honestly and not to make a fraudulent claim. There may be reciprocal duties on insurers to act honestly (including not capriciously or unreasonably) at the claim stage.
Jurisdictions differ widely in whether they recognise continuing good faith duties on insurers in claims handling, and how any breach is valued.
Other jurisdictions
In the United States, while punitive damages are generally not available for breach of contract, insurance bad faith cases are an exception. Where the insurer’s conduct is so outstandingly bad it amounts to breach of good faith, it is treated as tort, albeit committed in a contractual setting.
In some states the duty is statutory. The Texas Insurance Code allows treble damages for unfair insurance practices, including improper claims handling. These are reserved for knowing or intentional conduct. The test is whether the insurers had a reasonable basis for denying or delaying claim payment. A legitimate dispute over the scope of damage or repair costs would be considered reasonable.
In Canada, Whiten v Pilot Insurance Co [2002] 1 SCR 595 clarified that punitive damages are available for breach of an insurance contract. There the insurer declined a home owner’s claim following a fire, alleging arson, despite unequivocal evidence that the cause was accidental. The evidence established that the insurer had a calculated strategy to “starve the [home owner] into a cheap settlement” (at [131]).
The good faith breach was described as an actionable wrong separate from the breach of contract of failing to pay a valid claim. The Court put non-commercial insurance contracts in a special class, emphasising “peace of mind” rhetoric, the financial power imbalance, and the vulnerability of policy holders following a disaster.
Even in Canada, though, an insurer can rely on a reasonable interpretation of the policy and raise genuine issues in relation to coverage. To justify punitive damages, the conduct must be overwhelmingly inadequate or particularly callous, oppressive, vindictive, reprehensible or malicious.
Outside of North America, the position is very different. In the United Kingdom, if there is any good faith duty to act conscientiously, fairly and reasonably when dealing with claims, it is not actionable in damages. There is no implied term in insurance policies to negotiate and pay claims with reasonable diligence and speed2.
The Insurance Contracts Act 1984 introduced a good faith duty in Australia. This may require insurers to act consistently with commercial standards of decency and fairness and consider the interests of the insured3. However, it provides no specific remedy outside contractual damages.
New Zealand position – no basis for a good faith claim
The extent of the duty of good faith in New Zealand is unclear4. No New Zealand authority explicitly recognises an enforceable, general duty of good faith on insurers in claims handling. Imposing such a duty is not justified.
There is no scope in New Zealand to claim exemplary damages for breach of an insurance contract. Paper Reclaim Ltd v Aotearoa international Ltd [2005] 3 NZLR 188 confirmed that exemplary damages, “have no place in a principled system of contractual damages” at [180]-[183].
Civil liability in New Zealand requires causation and is directed at compensation for actual loss. Recovery beyond this may be a windfall. The civil jurisdiction is the wrong place for punitive remedies, without the safeguards of due process protections.
It is unlikely that insurers’ conduct in Christchurch approaches the exemplary damages threshold of outrageous, deliberate or reckless wrongdoing, or the calculated and reprehensible behaviour that North American Courts have condemned.
If claims handling and decision making is flawed, with insurers slow to respond, that may amount to breach of contract (Pegasus Group Ltd at [279]). If so, there are adequate contractual remedies for any recoverable loss.
Insurers must pay a valid claim promptly5. That is consistent with the Fair Insurance Code (FIC) and s 30 Consumer Guarantees Act 1993 (CGA), which provides that services will be completed within a reasonable time. The FIC has recently been revised and from 1 January 2016 will require enhanced standards of customer service and communication. The CGA also includes a reasonable skill and care obligation, with damages available.
Being out of funds can be compensated to some extent by an award of interest6 or damages calculated on the cost of renting alternative accommodation7.
Where failure to indemnify promptly in accordance with the policy causes substantial physical inconvenience or mental distress, general damages may be available. The insured’s conduct and contribution to any delay will be examined closely:
In Rout8, the Court found that the insured persisted with negotiations and inappropriately and in an unprincipled way claimed amounts not justified by evidence. General damages were refused.
In O’Loughlin9 the home owners claimed in excess of the contractual entitlements, and made a conceptual error in the claim, seeking a windfall to which they were not entitled. This would have to be addressed in any decision on general damages.
Contracting parties are frequently in situations where there is a power or financial imbalance, or vulnerability, the subject matter of the contract has vital importance, or delay causes distress and inconvenience.
The common law avoids interfering in private contractual relations. There is nothing special about insurance that requires uncertain remedies based around good faith. In New Zealand there is no principled basis for an extra-contractual good faith claim against insurers.
A senior associate at McElroys, Rebeccca Scott is an experienced litigator, specialising in insurance and professional liability claims. McElroys is a longstanding boutique insurance litigation practice and winner of the New Zealand Law Awards Insurance Specialist Law Firm 2014.
1. Neil Campbell, “A Sceptical View of Good Faith in Insurance Law” in Webb and Rowe (eds) Insurance Law Practice, Policy and Principles (Christchurch, 2004) at 205.
2. Insurance Corporation of the Channel Islands Ltd v McHugh [1997] L.R.L.R. 94 at [136].
3. CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1, page 12.
4. Pegasus Group Ltd v QBE Insurance (International) Ltd HC Auckland CIV-2006-404-6941, 1 December 2009 at [279].
5. New Zealand Insurance Ltd v Harris [1990] 1 NZLR 10 (CA).
6. X v Medical Assurance Society of New Zealand HC Napier CP26/98, 18 October 2000.
7. Dome v State Insurance General Manager (1987) 5 ANZ Insurance Cases 60-835.
8. Rout v Southern Response Earthquake Services Ltd [2014] NZHC 1053 at [203].
9. O’Loughlin v Tower Insurance Ltd [2013] NZHC 670 at [186] – [195].