What is Utmost Good Faith in Insurance Contracts

In the context of insurance contracts, the term good faith refers to the requirement that both parties to an agreement perform their duties honestly, fairly and with due care.
Insurance Contracts Duty Of Utmost Good Faith

Guide to Insurance Contracts Duty of Utmost Good Faith

Insurance contracts Duty of Utmost Good Faith

The duty of utmost good faith in insurance contracts obligates both parties to ensure that their contract is carried out fairly and according to plan. It is a commitment to fair dealing and commercial decency that goes both ways, and it is an essential principle of any insurance agreement.

Our helpful guide explains the duty of good faith, including both parties’ obligations when forming a contract agreement.

When you buy insurance, you are making a bet that something terrible will happen. You hope it never does, but you’re prepared for the worst. Part of what you’re paying for is the peace of mind that comes from knowing that if something goes wrong, you’ll be covered. That is what is known as utmost good faith.

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What is the principle of utmost good faith?

Acting in good faith requires that parties to insurance contracts do everything reasonably within their power to fulfil their contractual obligations.

Good faith is one of the most important principles of Australian law. It applies whether you’re buying a house, selling it, investing in shares, making a loan or signing up for insurance.

The concept of good faith is central to the way we conduct our lives. We rely on people being honest, trustworthy and reliable. If someone breaks their promise, we say they acted dishonestly; if they don’t keep their word, they are dealing unfairly.

What is good faith in contract law?

In the context of contracts, the term good faith refers to the requirement that both parties to an agreement perform their duties honestly, fairly and with due care. This includes meeting their contractual obligations without deliberately trying to avoid doing so and treating each other respectfully.

The concept of good faith has been around since Roman times. In the 12th century, Archbishop Thomas Becket wrote about the idea in his book Deeds of Kindness. He described how Christians had to behave towards Jews and Muslims. They could not refuse hospitality to strangers nor use unfair methods to gain an advantage over others.

Good faith under common law

The most important thing to remember when dealing with an insurance company is that they must act in good faith. The principle of good faith was initially created under common law when it was understood both parties entering a contract had a duty to cooperate.

In the past, both parties did not have access to crucial information when agreeing to an insurance contract. Now, because of this good faith legal duty, the party who knows must share this information so the other party can make an informed decision.

Insurance Contracts Act 1984

The Insurance Contracts Act 1984 aims to provide certainty that insurance contracts in Australia function fairly. This legislation seeks to safeguard the concerns of all parties to an insurance policy, including members of the public.

Section 13 of the Insurance Contracts Act

Section 13 of the Insurance Contracts Act 1984 stipulates the faith obligations of both parties for insurance agreements in Australia. Under this provision, both insurer and the insured have a duty of utmost good faith when entering a new contract. Similar to the common law duty, this begins with the pre-contract phase (the disclosure duty) to the post-contract stage (lodging and resolving insurance claims). This legislation also allows legal action for damages when one party breaches their duty.

The provisions of duty of care under section 13 include:

Duty of disclosure for insured party

You must know your legal requirement for proper disclosure. Failure to comply with this legislative policy can mean grounds to deny your claim against your insurance policy. In most circumstances, to satisfy this duty, you merely need to answer the questions on your insurance policy application truthfully. If you offer a blatantly unfinished or inappropriate answer to a question on the application form, and the insurer accepts your application, they are considered to have waived their duty. If you later lodge a claim against your insurance policy, the insurer cannot rely on your incomplete application to deny your claim.

If either party withholds information when forming an insurance agreement, it must be determined if the behaviour was naive or intently misleading. If you consider facts irrelevant and withhold this information, this is an innocent mistake. If an insurer would have taken the risk regardless, they cannot deny your claim. Fraud happens when you know a fact is important and choose to withhold that information. The insurer has a legal obligation to show evidence of dishonesty. They need to prove that you either knew the fact or that a reasonable person would have been aware that the withheld point was important.

Duty of disclosure for insurer

Section 22 of the Act requires the insurer to clearly communicate to the insured person the impact of not complying with the duty of disclosure when forming a new insurance agreement. When a dispute arises, the insurer is responsible for showing it clearly communicating this duty.


The duty of utmost good faith is a critical principle in insurance contracts. This duty obligates the insurer and the insured to deal fairly and in good faith. If either party fails to meet this obligation, they may be subject to legal consequences. Please contact our experienced insurance claim lawyers for advice if you have questions about how this principle applies to your situation. We can help you understand your rights and responsibilities under an insurance policy and ensure you can access all your entitlements. 



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