“Not an empty verbal formula” – the Federal Court imposes a civil penalty for failing to observe utmost good faith

The duty to act with utmost good faith is a foundational principle of insurance in Australia. An insurer’s failure to comply with that duty is a contravention of s 13(2A) of the Insurance Contracts Act 1984 (Cth) (ICA) and can attract civil penalties.[1]

In Australian Securities and Investments Commission v Hollard Insurance Partners Limited [2026] FCA 1487, the insurer (Hollard) admitted a contravention of the duty to act with utmost good faith arising from its handling of a single home insurance claim.  Hollard accepted the importance of home insurance, and the importance of timely and effective claims handling.[2]  We consider it is important to note at the outset that ASIC prosecuted this case as a contravention of s 13(2A) of the ICA, and not as a breach of Hollard’s AFSL obligations.

ASIC has identified claims and complaint handling failures by insurers as one of its enforcement priorities for 2026.[3] Although these proceedings pre-date the announcement of those priorities, the decision provides an  illustration of the conduct that is likely to attract ASIC’s regulatory scrutiny. Cash settlements for home insurance claims have also been an area of regulatory scrutiny more recently,[4] and Hollard's admitted failures in this case (to properly consider relevant expert reports, and to clearly explain the basis and value of its cash settlement offer) highlight the type of conduct ASIC is examining.

The contest before the Federal Court concerned only the quantum of the civil penalty. The parties held “diametrically opposed views” on the seriousness of the contravening conduct;[5] ASIC sought a $30 million penalty, while Hollard submitted that $100,000 to $300,000 would suffice. Justice Button described the gap as “patent” and imposed a penalty of $2 million.

Justice Button observed that the duty of utmost good faith “is real; it is not an empty verbal formula”,[6] and that it “attaches to claims handling as much as other matters relating to the contract of insurance”.

The assessment of claims handling will necessarily be fact specific. ASIC brought an earlier unsuccessful claim for alleged breaches of ICA s 13(2A) in relation to claims handling against OnePath.[7] Notwithstanding that Hollard admitted to liability, Justice Button published a decision which details the underlying conduct and steps taken by the insurer.  

Because contravention was admitted the findings that the circumstances considered in the case give rise to liability will not bind future courts.[8] Later courts determining contested arguments over similar issues are free to reach different conclusions, as was the case in the consumer credit area when admitted civil penalty cases were followed by ASIC’s unsuccessful case against Westpac in the Wagyu and Shiraz litigation.[9]

The Contravening Conduct

The Insureds had held home insurance with Hollard for their rural property in regional Victoria for around 20 years. On 29 October 2021, the property was damaged by a severe storm, which was declared an Insurance Catastrophe by the Insurance Council of Australia. The Insureds submitted a claim on 31 October 2021, reporting that numerous trees had been uplifted and some had impacted fencing.

Justice Button observed that, “what followed was a series of delays and shortcomings that, in combination, [gave] rise to the admitted contravention”.[10]

Hollard admitted a single contravention of s 13(2A), comprising the following conduct (taking place between 15 November 2021 and 28 April 2023):

• failing to promptly engage a structural engineer to assess the storm damage to the roof;
• failing to correctly assess how much of the boundary fence needed repair, and delaying in fixing that mistake;
• delaying further emergency works after being told the original make-safe works had failed to stop water getting in;
• delaying temporary accommodation;
• failing to sufficiently consider two written expert reports and an inspection report that were relevant to its decision to offer a cash settlement for the external roof;
• failing to communicate “in a sufficiently clear manner in writing”[11] about the reasoning for, and value of, that cash settlement; and
• delaying repairs to address growing mould. 

Following an AFCA determination in the Insureds’ favour, Hollard paid the Insureds an amount which exceeded the $1,003,322 sum insured.[12]

Hollard’s Chief Operating Officer gave evidence regarding the pressures facing the industry at the time,[13] the claims-handling problems inherited from CommInsure, which the Hollard Group acquired on 30 September 2022 and which almost doubled Hollard Group's size overnight, and the claims handling improvements Hollard has made since.[14]

The Duty of Utmost Good Faith

Justice Button observed that “a lack of utmost good faith is not to be equated with dishonesty only”,[15] and that it “may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured”.[16]

This has particular significance for home insurance, which concerns an asset of “special emotional and practical significance”.[17]  

Accepting the admitted contravention, Justice Button concluded that Hollard’s handling of the claim “fell well short of the basic level of fairness and reasonableness that community standards of decency and fair dealing require of an insurer in Hollard’s position”.[18]

Penalty Framework

The penalty for breach under s 13(2A) of the ICA is 5,000 penalty units (about $1.11 million at the time of the contravention).

Section 75D sets higher pecuniary penalties for bodies corporate, the maximum being the highest of:

1. the penalty specified for the civil penalty provision, multiplied by 10;
2. if the Court can determine the benefit derived and detriment avoided because of the contravention, three times that amount; and
3. 10% of the body corporate’s annual turnover for the 12-month period ending at the end of the month in which it contravened, or began to contravene, the civil penalty provision, capped at 2.5 million penalty units.

In this case, the theoretical maximum penalty was $81.6 million, being 10% of Hollard’s annual turnover for the relevant period.

In setting a penalty amount the Court must consider “all relevant matters”, including four matters that s 75B(5) specifically lists:

1. the nature and extent of the contravention;
2. the nature and extent of any loss or damage suffered because of the contravention;
3. the circumstances in which the contravention took place; and
4. whether the person has previously been found by a court to have engaged in any similar conduct.[19]

In addition, the Court is to consider the primary purpose of civil penalties, being to achieve:

1. specific deterrence (i.e., deterring the contravener itself and ensuring there is sufficient ‘sting’ without being oppressive); and
2. general deterrence (i.e., deterring potential future violators in the industry or broader public).[20]

Hollard’s Position on quantum of the penalty

Hollard argued that the penalty should be between $100,000 and $300,000.[21]

The Federal Court found that Hollard’s submissions “tended to downplay the seriousness of its contravening conduct”,[22] by stressing that the case concerned the mismanagement of a single insured’s home insurance claim, arising under a single policy of insurance, amounting to a single breach of the insurer’s duty of utmost good faith.[23]

Hollard also argued that, because its breach arose from several failures combined, the breach only occurred once the last of them was complete. The suggestion was that conduct “falling a hair short” of all the failures together would not have breached the duty of utmost good faith.[24] Justice Button said that this approach “tended to suggest there was really nothing too concerning in the bulk of the conduct”.[25]

ASIC’s Position

ASIC sought a penalty of $30 million, submitting that “[w]hen regard is had to the maximum penalty … a penalty less than tens of millions of dollars would not be sufficiently large to act as an effective deterrent.”[26]

On general deterrence, ASIC also stressed that the insurance industry in Australia is “immense”.[27] ASIC’s reliance on the scale of the industry is consistent with the regulator’s focus on monitoring and penalising industry-wide claims handling failures. However, Justice Button rejected the proposition that high industry turnover should bring about higher penalties, highlighting that even large insurers would regard $2 million for a single contravention as “something to be avoided”.[28]

Deterrence

Justice Button accepted that a penalty of $30 million was “not required for specific deterrence”,[29] noting that “common sense tells that increased claim loads associated with a recognised Insurance Catastrophe would be expected to affect claims handling”.[30]

The Federal Court, also considered that Hollard had instituted significant improvements since the breach by, inter alia, decreasing the claims load per claims handler, centralising the information for each claim onto a single accessible platform, flagging certain claims for escalation, and adopting a start-to-finish claims-handling model rather than the previous task-based model.[31]

Justice Button accepted that these changes would improve claims handling, stating that “a business that identifies issues and takes steps to address them without the pressure of regulatory enforcement action prompting the change is, in my view, a business less in need of specific deterrence than a business driven to make changes by the pressure of litigation”.[32]

While significant improvements had been made in claims handling, there is “always the risk of back-sliding”,[33] and the penalty proposed by Hollard was not deemed sufficient to achieve specific deterrence.

Further, Hollard was only profitable in two of the five relevant financial years, and ASIC’s proposed $30 million penalty was only $5 million less than Hollard’s combined profit in those two years. This rendered the proposed penalty oppressive.[34]

As to ASIC’s point on general deterrence, Justice Button concluded that “the level of penalty … is not to be simplistically set on the basis that a huge turnover of some industry participants warrants a very high penalty … That kind of analysis poses an obvious risk that oppressive penalties will be imposed”.[35]

Ultimately, the Court determined that a penalty of $2 million was sufficient to achieve both specific and general deterrence, noting that the statutory maximum is a point of reference and does not constrain the Court’s exercise of discretion.[36]

Section 75B(5) Matters

Justice Button considered the matters specifically set out in s 75B(5).

As to the nature and extent of the contravention, Justice Button took into account five matters:

• First, that Hollard’s conduct took place “over a sustained period of time”, which set it apart from cases involving “a single error or misstep”.[37]
• Second, that the conduct was “not the result of deliberate or malign conduct”[38]; rather, it was constituted by a series of failures, mostly involving delay.
• Third, that no senior management were involved (beyond their general responsibility for systems and resourcing) and ASIC had not run a ‘systems’ case.[39]
• Fourth, that the contravening conduct involved not just poor claims handling, but a claims-handling process in which there were several identified failures that, taken together, were sufficiently serious to put Hollard in breach of its duty to act with utmost good faith.
• Fifth, that the contravening conduct had long-lasting consequences for the Insureds.

As to the nature and extent of any loss or damage suffered, Justice Button had regard to the non-economic impact on the Insureds, being the distress endured, the significant inconvenience of moving between temporary accommodation, and the loss of sentimental possessions.

As to the circumstances in which the contravention took place, Justice Button referred to matters addressed elsewhere in the judgment, such as the pressures the industry faced at the time and the aftermath of the COVID-19 pandemic,[40] and the claims-handling problems arising from the ‘CommInsure’ acquisition.

Hollard had no prior findings of similar conduct,[41] and it was credited with early and genuine cooperation with ASIC.[42]

Concluding thoughts

Whilst this matter is highly fact dependent, it provides a helpful illustration of the considerations that a Court will take into account when assessing the quantum of a penalty. In particular, matters which impacted the Court’s decision included the organic efforts of Hollard to improve its claims handling, Hollard’s co-operation with ASIC, and the assessment of profitability in addition to turn over in evaluating whether a penalty would be oppressive. This case also demonstrates the importance ASIC and the Court place on the breach of the duty of utmost good faith. It may be of interest to the industry to see if ASIC will continue to pursue this avenue of redress as an alternative or in addition to an insurer’s AFSL duty to act fairly, efficiently and honestly.