Federal Court guidance on civil penalties for breaches of an insurer’s statutory duty of utmost good faith

Federal Court of Australia (Button J) | 9 October 2026 | $2 million civil penalty and costs

Executive Summary

The Federal Court imposed a $2 million civil penalty on an insurer for a single admitted contravention of s 13(2A) of the Insurance Contracts Act 1984 (Cth) (the Act), constituted by the combined effect of admitted prolonged and repeated claims-handling failures. The decision in Australian Securities and Investments Commission v Hollard Insurance Partners Limited [2026] FCA 1487 is the first example of a breach of the duty to act with utmost good faith resulting in a civil penalty being awarded. The failures arose from an insurer's handling of a single home insurance claim made after a severe storm damaged a rural Victorian property. They included delays in obtaining engineering advice, correcting the repair scope, and arranging emergency works and temporary accommodation causing the home to majorly deteriorate, together with failures to consider relevant reports and explain a proposed cash settlement clearly.

The only contested issue was penalty. ASIC sought $30 million; the insurer submitted that $100,000 to $300,000 was appropriate; and the agreed statutory maximum was $81.6 million. Button J held that $2 million was sufficient for specific and general deterrence. The conduct was sustained, serious and harmful, but was not deliberate or malign. The insurer's substantial system improvements, cooperation, contrition and absence of prior similar findings materially reduced the need for specific deterrence. The Court also compared the penalty with the insurer's profit to determine whether it would be an oppressive or proportionate deterrence, rather than relying solely on revenue which forms the basis of calculating the maximum penalty. The decision is significant because it confirms that the duty of utmost good faith is a substantive obligation governing claims handling, and that cumulative operational failures affecting a single claim can attract a substantial civil penalty.

Background Facts

The insureds were a couple living at a rural property in Scotsburn, Victoria. Their home and contents policy covered storm damage, reasonable emergency works and up to 52 weeks of reasonable temporary accommodation costs. A severe storm struck the property on 29 October 2021, damaging the roof, fencing and other parts of the property. The insureds lodged their claim on 31 October 2021, and the insurer allocated it to an external claims manager.

The claim was then affected by a series of delays and errors. The need for a structural engineer was identified in November 2021, but an engineer was not engaged until July 2022. Repeated errors were made in measuring the damaged fencing. Further make-safe works, temporary repair works required to prevent further damage and ensure safety, were delayed despite continuing water ingress. Although the property was considered unsafe by September 2022, temporary accommodation was not arranged until March 2023. The insurer further admitted that it had not sufficiently considered reports relevant to the cause of the roof damage, did not communicate clearly about the basis and amount of a proposed cash settlement, and delayed arranging mould remediation.

After the insureds complained to the Australian Financial Complaints Authority (AFCA), AFCA determined the complaint in their favour. The insurer ultimately paid approximately $1.55 million in relation to the claim and more than $243,000 to temporary accommodation providers. Those later payments were relevant to loss and mitigation, but did not erase the earlier admitted claims-handling contraventions.

The Contravention and Penalty Issue

Section 13(1) of the Act implies into every contract of insurance a provision requiring each party to act towards the other with the utmost good faith in respect of matters arising under or in relation to the contract. Under s 13(2A), an insurer that fails to comply with that implied provision contravenes the Act and is subject to a civil penalty.

The insurer admitted that the combined effect of seven categories of conduct amounted to one contravention. The Court therefore did not decide whether each category would independently constitute a breach. The sole disputed issue was the penalty to be imposed under s 75B, having regard to all relevant matters and the mandatory considerations in s 75B(5): the nature and extent of the contravention; resulting loss or damage; the circumstances of the contravention; and prior findings of similar conduct.

Decision

• Utmost good faith is not confined to acting dishonestly. It requires an insurer to act with due regard to the insured's legitimate interests and consistently with commercial standards of decency and fairness. In the circumstances, the insurer's claims handling fell well short of the basic standard of fairness and reasonableness required.
• The contravention was serious because it involved multiple failures over the period November 2021 to April 2023, including extended delay, inattention, inadequate assessment and poor communication. It was not, however, deliberate or malign, did not directly involve senior management, and was pleaded as an individual claims-handling case rather than a systems contravention.
• Deterrence remained the primary purpose of the penalty. The statutory maximum of $81.6 million was an important reference point, but only one yardstick. The penalty had to bear a reasonable relationship to the circumstances of the conduct and the contravener, without becoming oppressive.
• ASIC's proposed $30 million penalty was unnecessary and oppressive. The insurer had materially expanded its in-house claims team and reduced their load, invested in a centralised claims platform and monitoring tools, moved to end-to-end claim ownership, improved supplier oversight and catastrophe response, and implemented broader claims-handling reforms. Those changes were made through business improvement before the proceedings were commenced rather than in response to this litigation and reduced the need for specific deterrence.
• Whilst recognising that the insurer had made internal improvements and changes, however, its proposed penalty range of $100,000 to $300,000 lacked sufficient sting for an insurer of its size and would not adequately deter back-sliding. A $2 million penalty was sufficient for both specific and general deterrence. The Court confirmed that it considered it substantial enough to not be treated by insurers as an acceptable cost of doing business.
• The Court also took into account the distress and inconvenience caused to the insured, the insurer's cooperation and contrition, the absence of any prior finding of similar conduct, and the compensation the insurer ultimately paid to the insured.

The Court declared the contravention, imposed a $2 million pecuniary penalty and ordered the insurer to pay ASIC's costs.

Why It Matters / Practical Takeaways

Penalty significance

• This is the first civil penalty imposed on an Australian insurer for breach of the statutory duty of utmost good faith. The practical warning is broader than the amount: failures affecting one policy and one claim can still justify a multimillion-dollar penalty where the conduct is prolonged and cumulative.
• The decision sheds light on how a court will determine the appropriate penalty once a breach has been established. Rather than treating the penalty as a fixed percentage of the theoretical maximum, the Court assessed the amount required to achieve deterrence by reference to the seriousness of the contravention, the insurer's size and profitability, its remediation and cooperation, and whether the proposed penalty would be oppressive.

For insurers and claims-handling teams

• The duty of utmost good faith can incur penalties for conduct in relation to individual claims and does not require identification of a larger system error or common practice.
• Treat utmost good faith as an end-to-end claims-handling standard. Delay, poor handovers, inadequate expert engagement and unclear settlement communications may cumulatively cross the statutory threshold even where no single act is dishonest or deliberately unfair.
• Maintain a single, reliable claim record. The case illustrates the risk created by disconnected insurer and supplier systems, misfiled reports and task-based ownership. Claim ageing, expert recommendations, make-safe failures, accommodation needs and customer vulnerability should be visible and actively escalated throughout the lifecycle of a claim.
• Act on expert recommendations and explain coverage decisions in plain language. If an insurer departs from engineering or other technical evidence, the file should identify the competing evidence, the decision-maker's reasoning and the policy provisions relied upon.
• Outsourcing does not displace accountability. The insurer did not dispute that its external claims manager's acts and omissions were attributable to it under s 75V. Insurers require effective oversight of builders, assessors and claims managers, including tracking attendance, reports, repair scopes and outstanding actions.
• Remediation can materially affect penalty. If you realise that you are in risk of breach, make genuine attempts to improve systems. Genuine operational reform, cooperation and compensation reduced the need for specific deterrence here.

If this decision is relevant to your business, Clyde & Co has extensive experience advising insurers on claims handling, regulatory obligations and disputes arising under the Insurance Contracts Act. We regularly assist insurers with reviewing claims-handling practices, responding to regulatory scrutiny and managing complex or sensitive claims involving issues of utmost good faith. If you would like to discuss the implications of this decision for your claims operations or a particular matter, please contact a member of our insurance team.