Australia: Good faith in insurance policies - again?

In brief - Insurance industry will be impacted by strengthened penalties and insurers may face penalties of up to $210 million

Treasury is proposing key new provisions in the Insurance Contracts Act 1984 which will permit ASIC to apply for a penalty provision for breaches of the utmost good faith obligation and will see a substantial increase on the penalty for failure to provide a key fact sheet.

Treasury moves to increase ASIC's enforcement powers

For decades commentators have argued whether insureds have a US style cause of action for breach of good faith against insurers in respect of insurance policies.

It seems that in Australia there is still no separate cause of action for breach of good faith that stands alone from the remedies available under the Insurance Contracts Act and the policy. It does not appear that this will change.

The recent amendments to Part II of the Insurance Contracts Act permit ASIC to take steps where the insurer fails to comply with the duty of the utmost good faith in relation to handling of settlement and claims (section 14A).

ASIC also has the ability to bring proceedings in respect of licence conditions under the Corporations Act 2001 AFSL regime, but it is fair to say that ASIC's approach to regulation has been criticised - as we've seen at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hearings.

There is an efficiency issue at play, because ASIC's powers under the AFSL regime may not be effectively and efficiently deployed in respect of individual claims, as opposed to at a portfolio level.

The Treasury has just released an exposure draft of the Treasury Laws Amendment (ASIC Enforcement) Bill 2018 to amend the law in relation to penalties and other enforcement mechanisms within legislation administered by ASIC.

Schedule 4 proposes two key new provisions in the Insurance Contracts Act:

  1. a penalty provision for breach of the obligation to comply with the implied provision of utmost good faith in section 13 of the Insurance Contracts Act, and
  2. a significantly increased penalty provision for an insurer's failure to provide the key fact sheet required by section 33C

Penalty for breach of the duty of utmost good faith

Section 13 of the Insurance Contracts Act requires both parties to an insurance policy to act towards one another in respect of any matter arising under or in relation to the insurance contract with the utmost good faith.

The new provision, despite being expressed in respect of a "party", imposes a penalty on an insurer which fails to comply with the provision. The penalty will be 5000 penalty units (ie, at current rates of $210 per penalty unit, a maximum penalty of $1,050,000). This is not the end of the matter however, which we outline below.

Penalty for failure to provide key fact sheet

Insurers must provide a key fact sheet in respect of certain policies, such as for home buildings insurance and home contents insurance (Division 4 section 33C of the Insurance Contracts Act and Regulations 4A to 4C of the Insurance Contracts Regulations 1985).

Home insurers will be familiar with this requirement already.

The proposed Bill increases the penalty from $51,500 (ie, 150 penalty units at the current rate of $210 per penalty unit) to 5000 penalty units (ie, $1,050,000).

Civil penalties

Importantly, the penalties are civil penalties rather than criminal penalties, as is often the case under the Corporations Act.

This can have real implications for any person against whom ASIC proceeds, as the onus of proof is a modified version of the civil onus (ie, the balance of probabilities taking into account the seriousness of the charge), rather than the criminal onus of beyond a reasonable doubt.

Only ASIC may make such an application and it must be made within six years of the relevant contravention.

Court empowered to order further remedies beyond 5000 penalty units

Interestingly, beyond the civil penalties inserted into the relevant sections of the Act, the Bill permits a court to impose a pecuniary penalty, which is the greater of:

  • the penalty stated above, or
  • the benefit derived or detriment avoided by the individual multiplied by three

Where a body corporate (capturing almost all insurers) has breached the civil penalty provision, the court has an additional power to order the body corporate to pay a civil penalty equal to:

  1. 10% of the annual turnover of the body corporate for the 12 month period ending at the end of the month in which the body corporate contravened the provision, or
  2. if the turnover amount calculated at (a) is greater than the amount equal to 1,000,000 penalty units (ie, $210,000,000), the maximum pecuniary penalty for a body corporate is $210,000,000

Effects and consequences for insurers

Despite the eye-wateringly high maximum penalty provisions, the Bill allows for ASIC only to make an application for a pecuniary penalty order. There is no provision for a litigant/policy holder to make such an application, nor is there provision for a court to determine a civil penalty on its own motion.

The exposure draft has likely resolved the good faith question in a practical sense by suggesting powers be granted to ASIC rather than to policy holders or a court.

Together with Treasury's product intervention orders and (we expect) a removal of the exclusion of insurance claims handling from regulated activities under Chapter 7 of the Corporations Act, means that insurers face a new world where their claims handling will be scrutinised in more detail and at a licensing level.

We await the findings of the Royal Commission. Perhaps the Commissioner will consider this Bill to be an appropriate response to the misconduct issues raised in the Royal Commission hearings into insurance.

Toby Blyth
Insurance and reinsurance
Colin Biggers & Paisley

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.

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