In brief - ASIC to have new powers to intervene on behalf of insureds
The amendments to the Insurance Contracts Act will explicitly allow electronic communications, impact on the duty of utmost good faith and grant new powers to ASIC to initiate representative action on behalf of insureds.
Bill passed by both houses of parliament
On 20 June 2013, in the final sitting days of the life of this parliament, the Australian Senate agreed to the passage of the Insurance Contracts Amendment Bill 2013 (Bill). The Bill has now passed both houses parliament and will commence operation imminently after receiving royal assent.
The Bill will amend the Insurance Contracts Act 1984 (ICA) in a number of ways, perhaps most relevantly in relation to the following:
- Duty of utmost good faith
- Electronic communications
- The powers of ASIC
- Insureds' duty of disclosure
- Insurers' obligations in relation to disclosure
Duty of utmost good faith and ASIC's power to initiate an action
The Bill does not provide any further particularity as to what falls within the scope of the duty of utmost good faith, as already set out at section 13 of the ICA. However, the Bill makes clear that a breach of the duty of utmost good faith is not only a breach of contract, but also a breach of the ICA.
There is no suggested offence or penalty imposed in the Bill where there has been a breach of this duty. However, the Bill provides that where there has been a breach, ASIC will be entitled to initiate a representative action on behalf of an insured against an insurer. Insurers should be mindful of ASIC's new regulatory powers in these circumstances.
Electronic communication of notices and other documents expressly permitted
Whether notices and other information required under the ICA can be delivered electronically has been open for debate for some time. The Bill now lifts the exclusion of the ICA from the Electronic Transactions Act 1999 (Cth), expressly permitting the electronic communication of notices or other documents.
This could be a significant change to the industry and is clearly a positive development. Insurers can now unambiguously use electronic communications, which will likely result in cost savings.
Additional powers of ASIC to intervene
ASIC already has the responsibility for the general administration of the ICA. The Bill provides ASIC with the additional power to intervene and to be represented in proceedings, either by a staff member, a delegate, or a lawyer.
This amendment provides ASIC with a similar power to intervene to that which ASIC already holds under the Corporations Act. Insurers should be mindful of ASIC's new power to intervene and also to pursue an insurer for a breach of the duty of utmost good faith (as discussed above).
Insured's duty of disclosure
The present test under section 21(1) of the ICA in relation to the insured's duty of disclosure includes both subjective elements (what the insured knows to be relevant to the insurer's decision to accept the risk) and objective elements (what a reasonable person in the circumstances could be expected to know would be relevant to the insurer's decision).
The Bill provides for an amendment to section 21(1) of the ICA so that the objective element to the test is applied by reference to more certain considerations. In particular, the objective element now requires disclosure of what a reasonable person in the circumstances could be expected to know to be relevant "having regard to factors including, but not limited to, the nature and extent of the insurance cover to be provided under the relevant contract of insurance".
The Bill does not provide any detail of the specific factors that should be taken into account, so that it does not appear that the effect of the amendment is likely to be pronounced.
Insurers' obligation to inform and remind insureds of duty of disclosure
Section 22 of the ICA requires insurers to inform the insured clearly in writing of the nature and effect of the duty of disclosure, failing which an insurer may not exercise any right in respect of a failure to comply, unless the insured was fraudulent.
The Bill provides for amendments that seek to ensure that, where there is a delay between the initial disclosure and the commencement of the contract of insurance, the insured remains well aware of its continuing duty of disclosure.
There will be a new form of section 22 notice prescribed in regulations which will explain that the insured's duty of disclosure remains ongoing. Further, if there is a delay of more than two months between the most recent disclosure and the commencement of the contract of insurance, the insurer must provide a reminder of the ongoing duty.
These amendments will provide insurers (and brokers) with an additional onus to prepare new notices and to send reminders. However, it will likely assist insurers that insureds are fully aware of their ongoing obligations.
Other amendments to the Insurance Contracts Act
The Bill will amend the ICA in other respects, including the following:
- Workers' compensation contracts
- Rights and obligations of third party beneficiaries
- Cancellation of contracts
Amendments have benefits for both insurers and insureds
The passing of the Bill has been a long time in the making. The amendments arise from proposals that date back as far as a review commissioned by the Department of Treasury in late 2003.
However, there is broad consensus among stakeholders that the amendments are beneficial to both insurers and consumers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.