The duty of good faith and personal injury – a relationship considered

Key Points
  • The appellant claimed for personal injuries as a result of a fall allegedly flowing from an insurer’s breach of its duty of utmost good faith.
  • The Court of Appeal found that the insurer had not breached its duty of utmost good faith.
  • In any event, the appellant’s injuries were considered to be too remote to be compensable.

The Court of Appeal recently considered whether an insurer breached its duty of utmost good faith, and whether a man’s personal injuries were compensable as a result.

The New South Wales Court of Appeal has rejected a person’s claim for personal injuries allegedly flowing from an insurer’s breach of its duty of utmost good faith in the matter of Sudesh Sharma v Insurance Australia Limited t/as NRMA Insurance [2017] NSWCA 55.

On 29 December 2009 Mr Sharma lodged a claim with the NRMA for damage sustained to a carport during a storm.  After an assessor visited the property on 12 January 2010 and allegedly told Mr Sharma that the policy did not “pay for structures that are not built to standard”, Mr Sharma attempted to conduct repairs himself, resulting in a fall from a ladder on 14 January 2010.

On 18 January 2010 the NRMA denied the claim on the basis that:

  1. any damage was not caused by the storm; and
  2. the carport was the subject of wear and tear or faulty design or workmanship, as   excluded by the policy.

In the District Court, Mr Sharma claimed the costs of repairing the property pursuant to the policy, plus damages for personal injuries sustained as a result of his fall. One of the bases of Mr Sharma’s claim was that the NRMA had breached its duty of utmost good faith which resulted in the fall.

The primary judge found that the NRMA had not breached its duty of utmost good faith, and that Mr Sharma’s alleged personal injuries were in any event too remote to satisfy the test for remoteness in Hadley v Baxendale.

Mr Sharma challenged these findings on appeal.

The insurer’s alleged breach of the duty of utmost good faith

The Court of Appeal noted that an insurer’s duty of good faith is not limited to acting honestly and extends to an obligation to determine a claim for indemnity without due delay. The Court referenced the judgment in CGU Insurance v AMP Financial Planning where it was said:

“We accept the wider view of the requirement of utmost good faith … in preference to the view that absence of good faith is limited to dishonesty. In particular, we accept that utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests…an insurer’s statutory obligation to act with utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. Such an obligation may well affect the conduct of an insurer in making a timely response to a claim for indemnity.”

Given that the NRMA had arranged for an inspection of the property shortly after the claim was made, and by 18 January 2010 had advice from an assessor that the carport was not compliant (albeit after the fall), the NRMA was reasonably attempting to put itself in a position to make a decision regarding indemnity.

As such, the Court confirmed the lower Court’s finding on this point and thereby re-affirmed the Court’s view regarding the scope of an insurer’s duty of utmost good faith.

Were Mr Sharma’s injuries too remote?

In European Bank Ltd v Evans, the test for remoteness of contractual damages established in Hadley v Baxendale was explained as follows:

“The formulation of the rule in Hadley v Baxendale states that the entitlement of the plaintiff to recover such damages as arise naturally, that is, according to the usual course of things, from the breach of contract, or such damages as may reasonably be supposed to have been in the contemplation of both parties concerned at the time they made the contract as the probable result of the breach”.

The Court of Appeal considered that it was not in the usual course of things that someone will suffer personal injury as a result of a breach of an insurance contract covering property damage, and that it would not reasonably be contemplated that Mr Sharma would undertake repair work himself and that the policy would respond to any personal injuries sustained as a result of undertaking this repair work. As such, even if the NRMA had breached its duty of utmost good faith, the personal injuries claimed were considered to be too remote to be compensable.

Post by Patrick Hodgetts

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