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 provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith"
Mr Fitzgerald argued that by virtue of section 48 of the Act, he had a right of recovery to damages under section 13 even though he was not a "party" to the contract.
Section 48 of the Act states that:
(1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person's loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract.
(2) Subject to the contract, a person who has such a right:
(a) has, in relation to the person's claim, the same obligations to the insurer as the person would have if the person were the insured; and
(b) may discharge the insured's obligations in relation to the loss.
(3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured.
It was agreed between the parties that the common law duty of utmost good faith did not permit any claim for damages for its breach as it was an incident of the relationship between the parties to the contract rather than being implied into the contract itself.
The Decision
In rejecting Mr Fitzgerald's claim, Justice Jagot considered the authorities of Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pty Ltd (2009) 240 CLR 391 (
Zurich) and Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Insurance Cases 90-123 (Hannover).
In particular in the Zurich decision, in respect of which his Honour cited the judgments of French CJ, Gummow & Crennan JJ of the High Court that "Section 48 does not deem such a person to be a party to the insurance contract thus attracting the rights conferred on a party. It does not purport to confer contractual or equitable rights upon such a person. There is therefore no basis in section 48 for assimilating the position of a non party insured to that of a person who has entered into a contract of insurance within the meaning of section 45(1)"
It was submitted by Mr Fitzgerald's counsel that if section 48 did not confer such rights that it would not serve its purpose. This submission was rejected.
Rather, it was held that there was a distinction between a party to the contract and an insured person (a non party or third party beneficiary). A party to a contract of insurance was subject to the implied duty of good faith whereas section 48 gave a person a right to recovery of that person's loss. Section 48 did not deem an insured person to have the same rights as a party to a contract of insurance.
Discussion
It necessarily would follow that wherever in the Insurance Contracts Act, there is a reference to a "party" to a contract of insurance this term does not thereby apply to section 48 third or non party beneficiaries.
We also note, the judgment does not expressly refer to nor assist, with what is then to be done with section 48(2)(a). Subsection (2)(a) is in terms that confer the same obligations to the insurer as the person (non party) would have if the person were "the insured". By the words "the insured" it would seem to mean in context, 'a party to the policy' as otherwise, the sub section would not make any sense. This is because "the insured" is contrasted within the terms of the sub section, with a person who "has such a right" under section 48(1). This decision throws the meaning and effect of sub-section 48(2) into doubt.
It would seem from this judgement that it is possible that a third party beneficiary may owe insurers a duty under section 13 but not the other way around.
It has been established in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25 that section 48 enabled an insurer to rely on a defence of avoidance for breach of the duty of good faith as against a non-party insured.
If this decision by Justice Jagot is correct, it then begs the question of the scope of the operation of section 48 of the Act. In particular, in contract works policies where there are traditionally vast numbers of third party beneficial insureds as opposed to parties to the contract of insurance.
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