On 10 September 2003, the then Australian Federal Government announced that it would be undertaking a comprehensive review of the Insurance Contracts Act 1984 (Cth) (the Act). Its first act was to set up a Review Panel of Alan Cameron and Nancy Milne. The Review Panel published its report in two stages, the final stage of which was delivered to Government in June 2004. DLA Piper (then known as Phillips Fox) followed these developments closely. It was the only law firm to make submissions to every stage of the initial panel review. Since then, we have been involved on behalf of clients in numerous rounds of consultation on various draft versions of the proposed reform legislation, including both public Exposure Drafts and confidential drafts on which the Government sought to consult with key stakeholders, including the Insurance Council of Australia, the National Insurance Brokers Association and consumer groups. Throughout that process, the form of the legislation has varied, with some of the recommendations of the Review Panel being revised in the implementation while others were abandoned altogether.
On Thursday 14 March 2013, the Insurance Contracts Amendment Bill 2013 (the Bill) was introduced by the current Federal Government into the House of Representatives. Finally, it looks like the amendments will make it into law. Overall, the Bill introduces a number of well-directed amendments to the Act, which should further improve the operation of an Act that has operated well for over 25 years.
As the Parliamentary Secretary to the Treasurer, the Honourable Mr Rippol stated in the Second Reading Speech:
"Although many of the amendments are technical adjustments to the Act rather than significant changes to the framework of the Act, as a package they will operate to streamline and clarify requirements while maintaining appropriate consumer protections".
The Bill does not introduce any provisions relating to unfair contract terms. Those reforms will be the subject of separate legislation. The Government has announced that Exposure Draft legislation dealing with those proposed amendments will be released soon.
The changes affecting contracts of general insurance contained in the present Bill are outlined below.
UTMOST GOOD FAITH
There are amendments to section 13 of the Act to:
- Make a breach of the duty of utmost good faith a breach of the Act, without carrying a penalty or amounting to an offence
- Extend the duty of utmost good faith to apply as between third party beneficiaries and the insurer, but only after the contract is entered into
- Grant powers to the Australian Securities and Investments Commission (ASIC) to deal with a breach of the duty of utmost good faith in relation to the handling or settlement of claims (as if such failure was a failure to comply with a financial services law).
The Bill changes the treatment of bundled contracts under the Act. The effect of the amendments are that, where a single policy includes cover of the type usually found in exempt contracts and other cover to which the Act would apply, each of the above covers will be "unbundled' – that is, treated as if they were contained in separate contracts of insurance. Accordingly, only that part of the bundled cover which directly falls within the s9(1) exception will be exempted from the Act. All other aspects of cover will continue to be governed by the Act. However, where a workers compensation policy includes cover for both statutory workers compensation liabilities and common law liabilities, such covers will not be unbundled. That is, both aspects of cover will be exempt from the operation of the Act.
The Bill amends the Act to enable the service of any notice or document required by the Act to be effected electronically in compliance with the provisions of the Electronic Transactions Act 1999 (Cth) (Electronic Transactions Act). The Electronic Transactions Act will be amended to remove the current exemption of the Act. This simple, but long overdue, change will significantly increase the efficiency and reduce the cost of insurers doing business.
The amendments grant ASIC express power to intervene in proceedings arising under the Act and extend ASIC's right to bring representative proceedings to allow such proceedings to be brought on behalf of third-party beneficiaries as well as insureds.
GENERAL DUTY OF DISCLOSURE
The Bill contains amendments to the general duty of disclosure contained in section 21 of the Act such that the subjective/ objective test of "reasonable person in the circumstances" shall be applied, having regard to non-exclusive factors, including the nature and extent of the insurance cover to be provided under the relevant contract of insurance, and the class of persons to whom that kind of insurance cover is provided in the ordinary course of the insurer's business.
DUTY OF DISCLOSURE FOR ELIGIBLE CONTRACTS OF INSURANCE
The amendments will see the introduction of a new disclosure regime to apply at the renewal of an eligible contract of insurance. Under this new regime, the insurer may either ask one or more specific question relevant to the insurer's underwriting decision, or provide a copy of the insured's previous disclosures and request the insured to either disclose any changes or inform the insurer that there have been no changes.
If the insurer does either, or some combination of the above, then it is taken to waive the duty of disclosure in relation to any other matter. If the insured correctly answers any specific question asked and/or informs the insurer of any changes to previous answers, then it is taken to have complied with the duty of disclosure. If the insured does not respond to a request to inform the insurer of changes to previous disclosures, it is taken to have informed the insurer that there has been no such change.
The Bill introduces a number of reforms in relation to third-party beneficiaries, including:
- Inserting a definition of "third-party beneficiary"
- Extending the duty of utmost good faith to third-party beneficiaries, but only after the contract is entered into
- Extending to third-party beneficiaries the same rights as an insured to give notices under s41 – requiring an insurer to elect whether to extend indemnity to the third-party beneficiary or waive any contractual prohibition on the making of any admission or entering into any settlement or compromise
- Clarifying section 48(2), which deals with the defences available to an insurer for claims by third-party beneficiaries, so as to make it clear that the insurer may raise, as against the third-party beneficiaries, a defence based upon the conduct of the insured (such as non-disclosure or breach of conditions)
- Conferring on third-party beneficiaries the same rights as an insured in relation to subrogation
- Extending s51 rights, by which a person with a claim against an insured can proceed directly against the insurer where the insured is dead or cannot be found, so that such rights also apply for claims against third-party beneficiaries.
The Bill repeals the existing provisions of the Act dealing with subrogation and inserts a new regime, by which the person who funded the recovery has a priority over the proceeds of the recovery to the extent of its payments and the costs of the recovery action with the balance will be paid to the non-funding party. Where the proceedings are jointly funded, the parties' relative entitlements are calculated on a pro rata basis in proportion to the parties' contribution to the funding of the recovery action. The new provisions are subject to any other agreement to the contrary, either contained in the policy or entered into subsequent to the loss.
The amendments contained in the Bill are proposed to commence in a staggered fashion. Some amendments will commence upon Royal Assent. Others will commence six months, 12 months or 30 months later. Some provisions will only apply to contracts entered into after commencement of the amendments. Generally, those provisions which require insurers to change their procedures or documentation are subject to the later commencement dates. The provisions dealing with the duty of disclosure will not commence until a period of 30 months after the Act receives Royal Assent. However, insurers may choose to opt into the new disclosure regime in relation to the renewal of eligible contracts earlier.
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