This Latin term represents a cornerstone of all contracts of insurance and translates as ‘utmost good faith’ for both parties to the contract. The concept originated in common law, but was codified in the Insurance Contracts Act 1984 and is now an implied term in every Australian contract of insurance.
Interestingly, the concept of utmost good faith sits as a polar opposite to the traditional principle of contract law, which is ‘caveat emptor’ or ‘buyer beware’. This puts insurance contracts in a special position in relation to the body of contract law.
Insurance offered through industry superannuation funds is provided via a contract between the trustee and the insurer and terms such as ‘group life’ and ‘salary continuance’ are usually used to describe such contracts. Members of the fund are the beneficiaries of these contracts and the trustee has a legal obligation to act in the interest of members as a fiduciary.
However, the contract of insurance between the trustee and insurer contains no element of fiduciary obligation – it is simply governed by the terms and conditions of the contract. The insurer has no fiduciary obligation to the member, only a contractual duty.
So the obligation of utmost good faith applies to the insurer at point of claim. If the member is covered at the time of illness or accident and the conditions of the contract are met, the insurer is bound to pay the claim according to the agreed terms. If a problem arises, it is the duty of the trustee to pursue the claim in the interest of the member. However, if the claim is outside the terms of the contract of insurance, the trustee has fulfilled its obligation and is not obliged to do anything further.
Acceptance and payment of such a claim would mean that the other members of the fund would be paying the claim from their accounts and the trustee would actually be in breach of its obligation to the membership as a whole. The overriding principle here is the ‘sole purpose test,’ which requires the trustee to provide the maximum retirement benefits to members and their dependants.
However, with group contracts of insurance there are complexities that are built into the contracts, such as eligibility requirements, which are necessary for the equity and overall balance for the members as a group. In short, some terms of group insurance policies are built into the contract to help keep the premiums low for all members. Eligibility requirements such as the ‘at work test’ are particularly relevant upon joining a fund, when a merger takes place or when significant changes to the policy take place. If this requirement is not met, any claim may not be paid.
The utmost good faith requirement is also significant when fund members apply for increased insurance or for any change in cover, which requires filling in a form or providing information to the insurer. The applicant must answer all questions honestly and completely disclosing all material facts. If there are questions on the form, they should be read and answered under the uberrimae fides principle. A cursory answering or ticking the ‘no’ box could result in non-payment by the insurer at time of claim. For example, in the case of a member applying for a higher level of death cover who does not disclose a pre-existing condition or who fails to answer other questions honestly may, on the face of it, receive the cover.
At point of claim, or in this case, the death of the member, the insurer will be provided with a complete medical history of the deceased and may void the contract on the grounds of non-disclosure. The position of the insurer is simple – if the member had disclosed the information requested on the form, the higher level of cover would not have been provided. The contract is void and the higher level of cover will not be paid.
It is important to understand how your insurance works as a member benefit provided by your fund and in utmost good faith I can tell you it is a valuable protection to have in times of need.