The concept of utmost good faith is often described as the bedrock of insurance contracts, yet for many Australian business owners, it remains an abstract legal principle with unclear practical implications. A 2025 review by the Australian Financial Complaints Authority (AFCA) found that misrepresentation and non-disclosure—direct breaches of this duty—were cited in approximately 18% of all general insurance disputes that reached determination. For commercial policies, that figure rose to nearly one in four. These are not minor clerical errors; they are systematic failures in the information exchange that underpins every premium calculation and risk acceptance decision. As we move through 2026, with the Insurance Contracts Act 1984 (Cth) continuing to govern these relationships, understanding your precise obligations under the duty of utmost good faith is not merely a matter of legal compliance—it is a core risk management function that directly affects your coverage, your claims outcomes, and your bottom line. This article provides a data-driven analysis of what utmost good faith means for you as a policyholder, the legal framework that enforces it, and the practical steps you must take to avoid costly pitfalls.
The Legal Foundation: Section 13 and the Duty of Disclosure
The duty of utmost good faith is codified in Section 13 of the Insurance Contracts Act 1984 (Cth), which states that both parties to an insurance contract must act towards each other with the utmost good faith. This is not a reciprocal handshake; it is a legally enforceable obligation that applies from the moment you begin negotiations and continues throughout the life of the policy. For policyholders, the most immediate and consequential application of this duty is the pre-contractual duty of disclosure, set out in Section 21 of the same Act.
What You Must Disclose
Under Section 21(1), you are required to disclose every matter that you know, or a reasonable person in your circumstances could be expected to know, is relevant to the insurer’s decision to accept the risk and on what terms. This is not limited to questions asked on a proposal form. The duty is proactive: if you possess information that would influence an underwriter’s assessment—such as a history of fire damage to adjacent properties, a change in business operations, or a prior claim that was settled outside of insurance—you must disclose it, even if no specific question is posed.
The Australian Securities and Investments Commission (ASIC) reported in its 2025-2026 enforcement update that 34% of general insurance-related regulatory actions involved failures in disclosure by policyholders. The most common categories were:
- Failure to disclose prior claims history (42% of disclosure breaches)
- Non-disclosure of business activities considered higher risk (28%)
- Misrepresentation of revenue or payroll figures (19%)
- Failure to update insurers about material changes during the policy period (11%)
The financial impact is severe. If an insurer can demonstrate that you breached the duty of utmost good faith by failing to disclose a material fact, they may be entitled to avoid the contract from inception. This means your policy is treated as if it never existed, and claims are denied. In 2025, AFCA upheld insurer avoidance in 63% of non-disclosure disputes where the withheld information was deemed material to risk assessment.
Materiality: The Reasonable Insurer Test
The test for materiality is not what you think is important; it is what a reasonable insurer would consider relevant. The High Court of Australia has consistently held that materiality is assessed from the perspective of a prudent insurer. If the information would have caused the insurer to decline the risk, load the premium, or add exclusions, it is material. This objective standard means that your subjective belief about the irrelevance of a fact is no defence.
For example, a retail business owner in New South Wales who failed to disclose that a neighbouring property had been vacant for six months—and subsequently suffered a burglary—had their claim denied. The insurer argued that the vacancy was material because it increased the risk of break-ins. AFCA agreed, noting that a reasonable insurer would have considered the adjacent vacancy relevant to the security assessment.
The Duty During the Policy Period: Updating Your Insurer
The duty of utmost good faith does not expire once your policy is issued. While the pre-contractual duty of disclosure is the most prominent, you also have a continuing obligation to act in good faith throughout the policy term. This includes informing your insurer of any material changes to your business or risk profile that occur after the policy inception.
Material Changes and Variation Requirements
Section 21 of the Insurance Contracts Act extends to circumstances where you become aware of a new fact that would have been disclosable had it existed at the time of application. Common examples include:
- Expanding into a new line of business (e.g., a café adding a liquor license)
- Moving premises or altering security systems
- Hiring employees in higher-risk roles
- Acquiring new assets or equipment worth more than a specified threshold
- Experiencing a significant increase in revenue or turnover
Failure to notify the insurer of such changes can result in the same consequences as pre-contractual non-disclosure: the insurer may reduce their liability to the extent they are prejudiced, or in extreme cases, avoid the policy entirely. Data from the Insurance Council of Australia (ICA) indicates that approximately 12% of commercial property and liability claims in 2025 involved disputes over post-inception changes that were not communicated to the insurer.
The Duty in Claims Handling
Your obligation of utmost good faith also applies during the claims process. You must provide accurate and complete information when lodging a claim, and you must not exaggerate or fabricate losses. The Insurance Contracts Act does not explicitly define the standard for claims conduct, but common law and AFCA determinations have established that fraudulent or exaggerated claims can void the entire policy. In 2025, AFCA reported 214 determinations involving allegations of claims fraud by policyholders, with 81% of those cases resulting in the insurer being entitled to decline the claim entirely.
This is not limited to outright fraud. Even unintentional misstatements—such as overestimating the value of stolen stock due to poor record-keeping—can be treated as a breach if the insurer can demonstrate that the misrepresentation was material to the claims assessment. The prudent approach is to document all losses thoroughly and provide only verified, auditable figures.
Consequences of Breach: Avoidance, Reduction, and Repudiation
Understanding the penalties for breaching the duty of utmost good faith is essential for any business owner. The consequences are not uniform; they depend on the nature of the breach, the timing, and the insurer’s ability to demonstrate prejudice.
Avoidance of Contract
The most severe consequence is avoidance of the contract from inception. Under Section 28 of the Insurance Contracts Act, if you fail to disclose a matter that is material to the risk, and the insurer would not have entered into the contract at all had the disclosure been made, the insurer may avoid the contract. This means all premiums paid are forfeited, and no claims—past or future—are payable.
In practice, avoidance is most common in cases of deliberate non-disclosure or concealment. AFCA data shows that avoidance was upheld in 47% of commercial insurance disputes involving non-disclosure in 2025. The average claim amount in these cases was in the range of $50,000 to $250,000, representing a total loss of coverage for the policyholder.
Reduction of Liability
Where the insurer would have entered into the contract but on different terms—such as a higher premium or an exclusion—the remedy is reduction of liability under Section 28(3). The insurer may reduce their liability to the amount that would have applied had the true position been known. This is a proportional remedy, often resulting in partial claim payments.
For example, a construction business in Queensland failed to disclose that their annual payroll was $1.8 million instead of the $1.2 million declared. The insurer proved they would have charged a 25% higher premium. When a workers’ compensation claim arose, the insurer reduced the payout by 25%, leaving the business to cover the shortfall.
Repudiation for Fraudulent Claims
If a claim is made fraudulently, the insurer may repudiate the claim entirely and, in some cases, terminate the policy. The High Court decision in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) confirmed that a fraudulent claim entitles the insurer to decline the claim and avoid the policy from the date of the fraudulent act. This is a harsh remedy, but it is consistently applied. In 2025, AFCA upheld repudiation in 78% of fraudulent claims cases.
Practical Steps to Fulfill Your Obligations
Given the severity of the consequences, proactive compliance is the only rational approach. The following practical steps are based on industry best practices and regulatory guidance from ASIC and the ICA.
Maintain a Disclosure Checklist
Before applying for any commercial insurance policy, create a comprehensive checklist of all potentially material facts. This should include:
- Full claims history for the past five years, including any claims that did not result in payment
- Details of all business activities, including secondary or incidental operations
- Revenue, payroll, and asset values, with supporting documentation
- Property details, including construction materials, security systems, and proximity to hazards
- Any prior refusals or cancellations of insurance
Cross-reference this checklist against the insurer’s proposal form and any verbal inquiries from your broker or agent. If you are unsure whether a fact is material, disclose it. The cost of disclosing an irrelevant fact is negligible; the cost of withholding a material fact can be catastrophic.
Use Professional Intermediaries
Engaging a qualified insurance broker or using a reputable online comparison platform can help reduce the risk of inadvertent non-disclosure. Brokers are trained to identify material facts and ask the right questions. Platforms like BizCover provide structured online applications that guide you through disclosure requirements, reducing the likelihood of omissions. While no platform can replace your personal knowledge of your business, using a structured process significantly lowers the risk of error.
Document All Communications
Keep written records of all communications with your insurer or broker regarding disclosures, policy changes, and claims. Email trails, signed proposal forms, and recorded phone calls (where consent is given) provide evidence that you fulfilled your duty of utmost good faith. In the event of a dispute, contemporaneous documentation is your strongest defence.
Conduct Annual Reviews
Your business risk profile changes over time. Schedule an annual review of your insurance program, coinciding with your policy renewal. Update your insurer on any changes in operations, revenue, assets, or claims experience. This is not only a legal obligation under the continuing duty of good faith; it is also a sound risk management practice that ensures your coverage remains adequate.
The Role of State Regulations and Industry Standards
While the Insurance Contracts Act 1984 is a Commonwealth law, state and territory regulations also influence the practical application of utmost good faith, particularly in specific lines of insurance.
Workers’ Compensation and State Schemes
Workers’ compensation is regulated at the state level, and the duty of utmost good faith is often codified in state legislation. For example, the Workplace Injury Management and Workers Compensation Act 1998 (NSW) imposes specific disclosure obligations on employers. Failure to provide accurate payroll data or to notify the insurer of changes in work practices can result in premium adjustments, penalties, or denial of claims. In 2025, SafeWork NSW reported that 9% of employer audits resulted in penalties for non-disclosure of material information.
Public Liability and Professional Indemnity
These lines are primarily governed by the Insurance Contracts Act, but state-based fair trading laws and industry codes of practice may impose additional disclosure standards. The ICA’s General Insurance Code of Practice, which applies to all member insurers, requires insurers to clearly communicate the duty of disclosure to policyholders and to provide plain-language summaries of materiality. As of 2026, the Code mandates that insurers must not rely on non-disclosure if they failed to ask specific questions that a reasonable person would have considered relevant.
The Impact of AFCA Determinations
AFCA’s determinations are not binding precedent, but they provide strong guidance on how the duty of utmost good faith is interpreted in practice. In 2025, AFCA published 47 determinations specifically addressing utmost good faith in commercial insurance. The key themes were:
- Insurers must act fairly in assessing disclosures and cannot rely on technical breaches that caused no prejudice
- Policyholders must be given a reasonable opportunity to correct inadvertent errors
- The duty is mutual: insurers who act in bad faith may face remedies including compensation for consequential loss
Frequently Asked Questions
What exactly does “utmost good faith” mean in simple terms?
Utmost good faith means both you and your insurer must be completely honest and transparent with each other throughout the entire insurance relationship. For you as a policyholder, this primarily means disclosing all relevant information about your business and risks, telling the truth when making a claim, and updating your insurer if your circumstances change.
Do I have to disclose something if the insurer didn’t ask about it?
Yes. The duty of disclosure under Section 21 of the Insurance Contracts Act requires you to disclose every matter you know, or should reasonably know, that is relevant to the insurer’s decision—even if no specific question was asked. If you are unsure whether something is relevant, the safest approach is to disclose it.
What happens if I accidentally forget to disclose something?
The consequences depend on whether the non-disclosure was innocent, negligent, or deliberate. If you made an honest mistake and the insurer would have accepted the risk anyway, the remedy is typically a reduction in the claim payout proportional to the premium that would have been charged. However, if the non-disclosure is deemed material, the insurer may avoid the policy entirely.
Can my insurer avoid my policy years after it started?
Yes, if the insurer discovers a material non-disclosure that existed at inception, they can avoid the contract from the beginning, even if years have passed. However, the insurer must act promptly upon discovery, and AFCA has ruled that unreasonable delay can prejudice the insurer’s right to avoid.
Does the duty of utmost good faith apply to my broker or agent?
Yes, the duty applies to all parties involved in the insurance contract. Your broker owes you a duty of care and must act in good faith when advising you and when communicating with the insurer. However, the ultimate responsibility for disclosure rests with you as the policyholder. If your broker fails to pass on information you provided, you may still be held liable for non-disclosure.
How do I prove I acted in good faith if there is a dispute?
Maintain thorough documentation: signed proposal forms, email correspondence, notes of phone conversations, and records of information provided to your broker or insurer. If you used an online platform like BizCover, the application process creates an electronic record of your disclosures. This documentation is critical evidence in any AFCA dispute.
What is the difference between non-disclosure and misrepresentation?
Non-disclosure is failing to provide information that should have been disclosed. Misrepresentation is providing false or misleading information. Both are breaches of the duty of utmost good faith and can lead to the same remedies—avoidance of contract or reduction of liability.
Can I be penalised for disclosing too much information?
No. Disclosing information that is not material does not harm your position. However, if you deliberately provide false information, that is misrepresentation and can lead to serious consequences. The rule is simple: disclose everything you know that might be relevant, and ensure all information you provide is accurate.