On 12 February 2007, following consideration of the Cameron-Milne Report (Report), Treasury released the exposure draft Insurance Contracts Amendment Bill 2007 (the Draft) for public comment. Finally, on 17 March 2010 (over 3 years later) the Insurance Contracts Amendment Bill 2010 (the Bill) has been introduced into Federal Parliament.
By and large, the Bill reflects the Draft which itself arose out of recommendations made in the Report on the Insurance Contracts Act 1984 (the Act) with some notable exceptions.
Section 54 of the Act that 'sparked' the entire review of the Act in the first place has remarkably remained unchanged. Some of the proposed changes in relation to non-disclosure and the application of the Act have also been dropped while other proposed changes have been included, albeit sometimes in a modified form. The changes may open the way for greater electronic communication leading to increased savings for insurers.
Notably, various amendments have different dates of effect and some of the changes proposed, if passed by parliament, will only see the light of day a further 18 months from Royal Assent. Accordingly, insurers will not be rushed to come to terms with all the changes.
What's in and what's new? The key amendments
There have been a number of minor amendments proposed within the Bill and although by no means exhaustive, below are a few of the key proposals.
Schedule 1 – Scope and application (Date of effect: On Royal Assent)
- Failure to comply with the duty of utmost good faith is a breach of the Act;
Contracts of insurance that are entered into or proposed to be entered into for the purposes of workers' compensation law continue to be exempt under the Act, notwithstanding that they also include cover against employer liability at common law to pay damages for employment-related personal injury; and
- Contracts of insurance that include elements of cover that are exempted from the Act as well as cover that falls under the Act, are treated as exempt from the Act only in respect of the exempt elements.
Schedule 2 – Electronic Communication (Date of effect: A day to be fixed by proclamation)
- Amends provisions regarding the giving of notices, documents and information. Most notably, the amendment contains a note that the Electronic Transactions Act will now apply to permit electronic communication of notices or documents required to be given in writing;
- An amendment will also be made to Electronic Transactions Act 1999 to remove the current exemption in relation to the insurance contracts in that legislation; and
- Section 77 of the Act is to be repealed and the Bill proposes to address the electronic communication issues through a slightly modified mechanism. These changes could open the way for shorter form PDSs, incorporating material by reference (if notices can be provided electronically). We query whether the changes go far enough.
Schedule 3 – Powers of ASIC (Date of effect: On Royal Assent)
- Gives ASIC a statutory right to intervene in any proceeding relating to matters arising under the Act (and under the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003; and
- A newly introduced section 14A expands the Act to reflect a similar power to the existing power that ASIC has to intervene in proceedings under Section 1330 of the Corporations Act 2001.
Schedule 4 — Disclosure and misrepresentation (Date of effect: 18 months after the date of Royal Assent)
- The mixed objective/subjective test in section 21 which is used to determine if an insured has complied with their duty of disclosure, is clarified;
- The requirement to ask proposed insureds specific questions ('catch all' questions will no longer be permitted) under section 21A as a condition of enforcing the insured's duty of disclosure will apply on renewal of an eligible contract of insurance (proposed new section 21B) as well as at inception (but not for a variation, a reinstatement or an extension). This will place a greater onus on insurers in relation to disclosure;
- On renewal, insurers may choose to seek updates to answers previously provided by insureds, rather than asking specific questions again;
- An insurer must notify the insured, before the contract of insurance is entered into, that the duty of disclosure obligations continue until the time the policy is actually entered into;
- The Act provides that a form of words may be prescribed by regulation for use by insurers to inform persons of their duty of disclosure obligations;
- Any person who is not the insured but proposes to become a life insured under a contract of life insurance is subject to a duty to disclose, as well as a duty not to misrepresent, and the insurer must give this person notice of the duty before the contract is entered into; and
- A failure to disclose by the proposed life insured will be imputed to the insured.
Schedule 5 — Remedies of insurers: life insurance contracts (Date of effect: On Royal Assent (unbundling of life insurance contracts) and 12 months after Royal Assent (remedies for particular life insurance contracts)
- The remedies in section 29 are limited to contracts of life insurance that contain, or will contain, a surrender value or provide cover in respect of the death of a life insured — other types of life insurance are dealt with under a new subsection 28(1A) that offers similar remedies to section 28 in its current form;
- Life insurance contracts that combine more than one type of cover and more than one life insured are 'unbundled' for the purpose of applying the relevant remedies for non-disclosure or misrepresentation;
- The insurer can avoid a life insurance contract to which section 29 applies on the basis of non-disclosure or misrepresentation only if the insured would not have entered into that particular contract (as opposed to the current standard of any life insurance contract) on any terms;
- Insurers are entitled to change the expiration date of a life insurance contract (all types of life insurance, whether governed by new subsection 28(1A) or by section 29) where that date has been calculated by reference to the insured's incorrectly-stated date of birth; and
- A newly proposed amendment to the statutory framework in the Act is included whereby cancellation of general insurance contracts will be extended to life insurance contracts (subject to forfeiture rights for non-payment of premiums under the Life Insurance Act 1995).
Schedule 6 — Third parties (Date of effect: ASIC's powers to bring representative actions commence on Royal Assent. The remainder commence 12 months later)
- Individuals who have rights under a contract of insurance ('third party beneficiaries') but who are not the insured, will have access to particular rights and obligations currently held only by insureds;
- The changes seek to clarify that remedies available against the insured will also be available against third party beneficiaries;
- Third parties with damages claims against an insured or third party beneficiary who has died or cannot be found, may recover directly against the insurer;
- ASIC will have powers to bring representative actions on behalf of third party beneficiaries;
- Remedies for misrepresentation and non-disclosure are available in relation to contracts of life insurance that are offered as part of a group scheme that is unrelated to superannuation; and
- Remedies are available in respect of any misrepresentation or non-disclosure that occurs between when an insured became a member of a superannuation or other group scheme and when the life insurance cover is effected.
Schedule 7 – Subrogation (Date of effect: six months after the date of Royal Assent)
- Section 67 of the Act, which deals with the allocation of moneys recovered when an insurer exercises a right of subrogation in relation to an insurance claim, is revised to reflect wording of a draft provision dealing with subrogation proposed by the Australian Law Reform Commission in its review of the Marine Insurance Act 1909 (Cth); and
- Part VIII of the Act, which relates to subrogation, applies to claims made by third party beneficiaries as well as by insureds. The proposed changes are a significant departure from the common law.
What's out? 2007 Draft proposals excluded from the 2010 Bill
- Probably most significantly, the proposed insertion of section 54A and amendments to section 40 have been dropped. The intention was that an insurer would be able to refuse to pay a claim if the insured, under a claims made and notified policy, became aware of facts which might have given rise to a claim during the policy period but they did not notify the insurer in writing of those facts during the policy period or within 28 days after the cover expired. The proposed section 40(4) provided that the insurer must inform the insured of the effect of failing to give notice of circumstances not later than 14 days before the insurance cover expires. The combined amendments of sections 40 and 54 had proposed to overturn the current position as determined by the High Court in FAI v Australian Hospital Care.
- Section 8(1A) has been excluded. This section sought to address the issues raised in Akai Pty Ltd v People's Insurance Co Ltd by proposing amendments extending the scope of the application of the Act to contracts of insurance (if the contracts are entered into) by a person who is in Australia, irrespective of where the risk is located, and to contracts that cover the risk of loss or damage occurring in Australia.
- Section 31 has been excluded. This section expanded the court's power to grant relief from the insurer avoiding a contract of insurance on the grounds of fraudulent misrepresentation if it would be harsh and unreasonable not to do so. It would have included circumstances where there was innocent failure to disclose or innocent misrepresentation. This proposal was the subject of considerable criticism and its rejection is likely to be welcomed by insurers.
- Section 9A, clarifying that the Act applies to contracts providing cover for water transportation of personal or domestic goods in non-commercial quantities, has been excluded.
- Although not previously proposed for amendment in the Draft, we nevertheless note that despite recent consideration by the High Court of Australia no amendments to section 45 are included in the Bill.
Busy times for the insurance industry
The Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, has also released an options paper (OP) seeking comments on addressing unfair terms included in insurance contracts.
This has the potential to be more significant than the Bill. Insurers have strongly opposed the application of the unfair terms in contracts regime to insurance on the basis that the Act already adequately protects insureds. However, it appears that the government may press ahead with the application of the regime and are not likely to let insurers off the hook. This is on the basis that the current regime arguably provides a more difficult avenue for redress in terms of the onus of proof, remedies and clarity of the relevant test.
The OP sets out five possible options to deal with the potential for the actual or potential disadvantage or loss suffered by consumers as a result of insurance contracts containing contract terms that are harsh and/or unfair. The options are to:
- continue to address the problem through the operation of section 14 of the Act (as expected to be modified through the Bill);
- permit the unfair contract terms provisions of the Act to apply to insurance contracts: changes to the operation of section 15 would be made to permit the unfair terms provisions in the Act to operate in addition to, and alongside the remedies in the Act;
- extend the Act remedies to include unfair terms provisions: the Act would be amended to include remedies relating to unfair contract terms along the lines of those that are to be included in the Act but the provisions would be specifically tailored to the case of insurance contracts and the existing regulatory framework in the Act. Section 15 would continue in operation so that the unfair contract terms provisions of the Act would not apply;
- enhance existing Act remedies: existing remedies in the Act, particularly section 14, would be modified (beyond the changes proposed in the Bill) to improve their effectiveness to prevent use of unfair contract terms in standard insurance contracts with consumers. Section 15 would continue in operation so that the unfair contract terms provisions of the Act would not apply; and
- encourage industry self-regulation to better prevent use of unfair terms by insurers: use of unfair terms by insurers would be addressed through self-regulatory means, such as a specific section dealing with the issue in, for example, the General Insurance Code of Practice.
The Corporations and Financial Services Division of Treasury are accepting submissions until 30 April 2010 from stakeholders on the options put forward in the OP. There is likely to be strong opposition given the views expressed by insurers in the past.
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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.