By John Van de Poll and Uma Kotecha
The Insurance Contracts Act (ICA) has been described as one of the most significant and comprehensive pieces of consumer protection legislation ever enacted in Australia. Fundamental changes have recently been introduced, but it has also left matters silent on other fronts. The various provisions begin at different times between 28 June 2013 and December 2015, in order to allow insurers some time to amend their internal policies and procedures to take account of the new changes, many of which apply to general commercial policies. The majority of the provisions also only apply if the policy is entered into after the provision has commenced. It is imperative that brokers and underwriters are made aware of these changes.
One important change (which commenced on 28 June 2013) is that a breach of the implied duty of good faith will now be a breach of the ICA in addition to breach of contract. ASIC (which is already responsible for the general administration of the ICA and had a right to request documents) has now (as of 28 June 2013) been given greater powers akin to those which it has under the Corporations Act and can now intervene in any proceeding under the ICA. Specifically, if an insurer breaches its implied duty of utmost good faith, ASIC can bring representative proceedings against the insurer or exercise its power to vary, suspend, cancel or impose conditions on an insurer's AFSL licence.
A further change concerns third party beneficiaries (TPB) (who are not a party to the policy but are specified or referred to in it as persons to whom the benefit of the insurance extends). They will now (as of 28 June 2014) have rights on par with those of insureds. An insurer has to advise them whether it admits a claim is covered and whether or not it intends to take over the defence of that claim. However, it works both ways and TPB are now also subject to the duty of good faith and the defences the insurer has under section 41 can now be used against TPB. This will affect the rights of directors and shareholders under a D&O policy (where the named insured is the company) and the owner of a superannuation fund to the third party beneficiaries (the insured member). This may mean that insured members will have a right to request a copy of the policy document as well as having the right to sue the insurer directly (as opposed to the Trustee).
Further, the Act has finally been brought into the 21st century and brings the insurance industry into line with other industries, Notices under the Act which previously had to be sent by hand or post can now be sent by email (although this amendment is to commence by 28 December 2013) and insurers can put their Product Disclosure Statements online.
There are new provisions about the insured's duty of disclosure, which are due to commence by 28 December 2015. An insured has a duty to disclose every matter that is known to him/her being a matter relevant to the decision of the insurer whether to accept the risk (subjective test) and, if so, on what terms; or a reasonable person in the circumstances could be expected to know to be a matter so relevant (objective test). The changes clarify the objective element which now includes "the nature and extent of the insurance cover to be provided under the relevant contract of insurance" and the class of persons who would ordinarily be expected to apply for insurance cover of that kind" (although this is a non-exhaustive list). For example, what can be expected of a policy holder car driver in disclosing his driving history for car insurance for a period of one year will be different to what may be expected from a named driver on the policy, requesting insurance for a short period of time. As a result, increased attention may need to be paid to the scope of questions asked by an insurer during the underwriting process. However, the ICA does not state the specific factors to be taken into account and therefore it will largely turn on the circumstances of each case in determining if there was a breach of the duty of disclosure.
Currently, certain 'eligible' insurance policies (including motor vehicle insurance, home building and home contents insurance and consumer credit insurance) are subject to a different disclosure regime when first entered into under S21A (although on renewal the section 21 disclosure obligation applies). The insured must answer specific questions asked by the insurer. However, under the amended provisions to commence on 28 December 2015, section 21A no longer allows an insurer to ask catch-all questions requiring an insured to disclose 'exceptional circumstances'.
Further, there is a new section 21B which applies to all renewals after 28 June 2013 and requires the insurer to ask specific questions and/or provide a copy of the answers previously provided and ask the insured to disclose any changes. If the insurer asks a general catch-all question, the duty of disclosure is taken to have been waived. If it asks no such questions, it is deemed to have waived compliance with the duty of disclosure. If the insurer does ask the specific questions and the insured answers by disclosing each matter known to it, or which a reasonable person in its circumstances could be expected to have disclosed, the insured has complied with its duty of disclosure. This change is an attempt to balance the insured's disclosure obligations on renewal with the insurer's right to re-assess the risk and vary the premium. Insurers are currently required by section 22 of the Act to inform insureds of the general nature and effect of both types of duty of disclosure and therefore this will require insurers to amend their policy wordings where the duties are usually explained, product disclosure statements and application forms.
The obligation on insurers to inform the insured 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) has been expanded and this amendment commences on 28 December 2015. There is now a new section 22 notice which provides that the insured's duty of disclosure is ongoing, even in the period between the initial disclosure and commencement of insurance contract. If this period is greater than two months, the insurer must provide a reminder of the insured's ongoing duty. These provisions now also apply to life insurance policies. While there may be a somewhat administrative burden in relation to this, as it may require internal change to distribution practices, obviously the benefits outweigh the costs and it will make it more difficult for insureds to argue that they were not aware of the ongoing duty and means that an insurer can renegotiate a contract if circumstances change in the period in between initial disclosure and policy commencement.
There are now new rules (effective as of 28 December 2013) for recovering money following the exercise of subrogation rights under S67, although these can be varied by the terms of the insurance policy and are often, in practice, varied by a separate agreement. The party funding the recovery action is entitled to be reimbursed for the costs of doing so. If both parties contribute, both should be reimbursed (fully if possible but if not, pro rata) and any windfall is also distributed on this basis.
Just as interesting as the notable changes, is the question of what has not been included and it is arguable that the changes represent a refinement rather than a revolution as they do not go far enough. The somewhat controversial topic of imposing unfair contract terms (to which the Australian Consumer Law is already subject to) on general insurance policies is now being dealt with separately. Also the introduction of mandatory flood cover is also subject to a separate consultation process. Further, there is no clarification of section 54 of the Insurance contracts Act, which is surprising given the conflicting judicial stance taken between the Queensland and WA Courts following Matthew Maxwell v Highway Hauliers Pty Ltd  WASCA, although the recent Court of Appeal decision in Prepaid Services Pty Ltd v Atradius Credit Insurance NV provides some comfort in this respect.
Watch this space!
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