Workcover insurers have no common law good faith duties. Australia does not recognise the tort of acting in bad faith. Further, there is no term implied in a workers compensation insurance contract that the insurer must act in good faith….and that, folks, is one of the biggest problems injured workers have.
Unfair Claims Handling Practices in Workcover Insurance – No tortious Duty of Good Faith
In the USA, claiming that an insurer has failed to act in good faith towards its insured can result in large damages awards. While embracing the proposition that a duty of good faith and fair dealing is imposed by contract, the American courts also consider contracts of insurance to create a special relationship that gives rise to a tortious duty of good faith – hence exposing insurers to punitive or exemplary damages.
In Australia, a duty to act in good faith exists as an implied term in all insurance contracts regulated by the Insurance Contracts Act (by virtue of section 13 of the Act). A breach of this duty of good faith results in a liability for no more than compensatory damages and does not create any potential liability for exemplary or punitive damages. The question of whether a tortious duty of good faith exists for insurers in Australia has often been raised – particularly in regard to policies not regulated by the Insurance Contracts Act.
In Gibson v Parkes District Hospital (1991) 26 NSWLR 9, Badgery-Parker J concluded that there was at least an argument available that such duty existed but did not go so far as to find that such a duty formed part of Australian law.
Garcia –v- CGU Workers Compensation (NSW) Limited
Mr Garcia suffered an injury at work and sought compensation payments under a workers compensation insurance policy (a policy not regulated by the Insurance Contracts Act) taken out by his employer.
The insurer initially commenced weekly payments and met the costs of medical treatment but continued its investigations as to the injury and the extent it was work-related. Relying on a medical report, the insurer later declined the claim and ceased payments – on the basis that the injury was not work-related. Mr Garcia commenced proceedings against the insurer alleging that he suffered psychological injury and financial loss as a result of the insurer’s denial of his claim which, he said, represented a breach of the duty of good faith by the insurer.
NSW District Court Judgment
The trial judge found that due to the nature of the relationship between the insurer and Mr Garcia (as the worker, although not the insured) the insurer had a tortious duty to act in good faith to deal honestly and fairly in processing the claim. The trial judge further found that maintaining the insurer’s denial of the claim based on one medical report amounted to a breach of the insurer’s tortious duty of good faith to Mr Garcia. This breach gave rise to compensatory and exemplary damages.
The trial judge did not consider whether there was an implied contractual duty of good faith because of his conclusion reached in relation to the tort claim.
NSW Court of Appeal Judgment
The Court of Appeal unanimously held that the existing law did not support the existence of a tortious duty of good faith. Mason P, Santow JA and Hodgson JA agreed that the tort was not needed to meet any of the suggested inadequacies in the workers compensation statutory policy which were alleged on behalf of Mr Garcia. Furthermore, having regard to the statutory scheme for workers compensation which prescribes in detail the substantive and procedural rights and obligations of all participants, there were policy reasons negating the need to find that a tortious duty of good faith or an implied contractual duty of good faith existed.
In any event, the Court of Appeal did not accept that the insurer breached any duty by denying the claim and ceasing its payments. The statutory framework did not preclude the insurer from changing its position on the claim in response to new evidence.
The Court of Appeal also unanimously found that there was no authority to support the suggestion that an implied term of good faith is to be inserted into every contract or even into every aspect of a particular contract. In any event, this alleged implied contractual duty was not necessary to give efficacy to the statutory policy created by the workers compensation legislation and would in fact contradict the express terms of the policy and the statutory framework.
This NSW Court of Appeal decision is reassuring to insurers and is consistent with decisions made in other common law jurisdictions in the world (outside the USA). Insurers can breathe a sigh of relief and know that they are not exposed to any claims for exemplary or punitive damages arising from alleged breaches of a suggested common law duty of good faith.
No Tortious Duty of Good Faith
Thanks to our co-author “Trinny” we also found an excellent, but mainly NZ based, article very revealing about good faith in Australia and whom it serves:
A Leap of Good Faith:A Possible Response to Unfair Claims-Handling Practices in Insurance
- Bad faith claim against workcover insurance company
- Some Signs Of Bad Faith Insurance Claims Settlement Practices
- Workcover insurance bad faith negotiation tactics