On 10 September 2003 Senator Helen Coonan (then Minister for Revenue and Assistant Treasurer) and Senator Ian Campbell (then Parliamentary Secretary to the Treasurer) announced that the government was undertaking a comprehensive review of the Insurance Contracts Act 1984 ("the Act"). The government appointed Mr Alan Cameron AM and Ms Nancy Milne as the Review Panel who were supported by a Secretariat within the Treasury. The stated objective of the review was to make recommendations aimed at improving the overall operation of the Act through correcting deficiencies and clarifying ambiguities in its operation.
The Review Panel produced two reports:-
- Review of Section 54 of the Insurance Contracts Act 1984 (final report provided to the government on 31 October 2003).
- Review of the remainder of the Insurance Contracts Act (final report provided to the government on 30 June 2004).
For almost three years not a lot was heard about the reform agenda until a flurry of activity in February 2007 when a package of Exposure Draft Legislation and Explanatory Materials was released by the Treasury. No further steps were taken by the government, due in large part to other more pressing issues which included the 2008 re-election campaign.
At the start of this year rumblings to do with the introduction of the Insurance Contracts Amendment Bill were met with a level of scepticism normally reserved for those who dared to suggest a revival in Queensland Rugby. On Wednesday 17 March 2010, the Insurance Contracts Amendments Bill 2010 was introduced into the Commonwealth House of Representatives, and the Queensland Reds were sitting just outside the top four on the Super 14 Rugby table. The sceptics have been silenced . . . for the moment.
We set out below a brief review of the provisions contained in the Insurance Contracts Amendment Bill 2010. We should point out that we only mention the more significant amendments and have not commented on all of the reforms to life insurance contracts, nor provisions affecting bundled cover (package policies). We will deal with all relevant issues in our upcoming Boardroom Update on the Insurance Contracts Act.
NO REFORM OF SECTION 54
Much of the call for the review of the Insurance Contracts Act (ICA) in 2003 was generated by concerns regarding the affect of Section 54 on claims made and claims made and notified policies. The High Court decision in FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd was still fresh in the minds of those calling for the review. In that case the FAI claims made policy had a "deeming provision" which provided that should the insured notify the insurer of "events or circumstances" which may give rise to a claim within the period of insurance, then any subsequent claim made outside that period would be deemed to have been made within the policy period. The High Court held that a failure to notify the insurer of such "circumstances" within the policy period could be excused under section 54, meaning that a later claim, made outside the policy period, could be brought back within cover. Quite rightly the decision caused a stir within the industry at the time and was subsequently said to be having a material impact on the professional indemnity insurance market in Australia through the withdrawal of capacity by insurers (particularly London insurers). More than six years down the track it seems that the market has adjusted to the difficulties which Section 54 caused in the claims made context, and that reform of the section is no longer required. The deeming provisions within claims made, and claims made and notified policies, have largely been removed, at least by Australian underwriters, and those who choose to keep them in the policy know where they stand in the eyes of the law.
THE DUTY OF UTMOST GOOD FAITH
Section 13 of the ICA implies a term into every insurance contract that each party act towards the other with the utmost good faith. A breach of that implied term will entitle the aggrieved party to make a claim for breach of contract provided that they can show loss.
The amending legislation takes the duty of utmost good faith a few steps further by:-
- Extending the benefit to third party beneficiaries; and
- Making a breach of the implied term a breach of the Act.
By making a breach of the duty of utmost good faith a breach of the Act, the amendments will allow ASIC to commence or continue a representative action on behalf of an insured against an insurer. This is not an amendment to be taken lightly, as any breach of the duty of utmost good faith by an insurer may enable ASIC to access remedies under the Corporations Act 2001 which affect Australian financial services license holders. Those remedies include a banning order, suspension or cancellation of the financial services license, imposing conditions on the license and imposing an enforceable undertaking not to act in a particular way.
Currently notices required to be given under the ICA cannot be given electronically. The ICA is exempt from most of the operative parts of the Electronic Transactions Act 1999 which provides generally that where a Commonwealth law requires a notice to be given in writing, the notice may be given electronically if certain conditions are met.
It was widely recognised that the ICA needed to be updated to allow for communication by electronic means. The proposal is to remove the current exemption from the Electronic Transactions Act 1999.
There is provision made in the amendments for the content and legibility of electronic notices sent under the ICA to be regulated eg. it is anticipated that there will be restrictions on what material might accompany a statutory notice sent electronically. Advertising material, pop-ups or other links which may distract the recipient will presumably be prohibited.
DISCLOSURE AND MISREPRESENTATION
The amending legislation contains a number of provisions dealing with disclosure and misrepresentation, the effect of which will require insurers (and brokers) to adjust their business practices. The government has recognised that such changes will not be able to be made overnight and so has built in an 18 month delay from when the legislation receives Royal assent to when changes impacting disclosure and misrepresentation take effect.
INSURED'S DUTY OF DISCLOSURE
Section 21 of the ICA governs the insured's duty of disclosure. What the insured must disclose before a contract is entered into is determined by two tests:-
- Subjective test – what the insured knows to be a matter relevant to the decision of the insurer on whether to accept the risk and if so on what terms.
- Objective test – what a reasonable person in the circumstances could be expected to know to be a matter so relevant.
Over time the objective test has been applied inconsistently. Does the reference to "a reasonable person in the circumstances" refer to "extrinsic factors" (such as the circumstances in which a policy of insurance is entered into) or should "intrinsic factors" (such as an insured's business acumen, education, cultural background and the like) also be taken into account? The amending legislation has sought to address this uncertainty by rephrasing the objective test to read:-
It may be more helpful if the amending provisions rule out reference to intrinsic factors if that is the desire.
ELIGIBLE CONTRACTS OF INSURANCE
Eligible contracts of insurance are prescribed by regulation and include the following types of cover:-
- Motor vehicle.
- Home buildings.
- Home contents.
- Sickness and accident.
- Consumer credit.
Section 21A of the ICA requires an insurer to ask the insured specific questions relevant to the insurer's decision on whether to accept the risk, and if so, on what terms. An insurer is also permitted to ask a "catch all" question requiring an insured to disclose "exceptional circumstances" relevant to the insurers decision to accept the risk. The Review Panel considered the current ability to ask "catch all" questions as undermining the protection afforded to consumers.
The amending legislation requires an insurer to ask an insured wishing to acquire cover, specific questions relevant to the insurer's decision on whether to accept the risk. If it fails to do so the insurer is taken to have waived the requirements for disclosure. The amending legislation does away with "catch all" questions, and if included in an application, they will have no effect.
Currently Section 21A does not apply to renewals. The amending legislation changes this. Upon renewal of an eligible contract an insurer wishing to rely on the insured's duty of disclosure is required to:-
- Ask specific questions; and/or
- Before entering into the contract provide the insured with a copy of any matters previously disclosed in relation to that cover and request that the insured disclose any changes to those matters or to indicate if there is no change.
If the insurer does neither on renewal, then it is taken to have waived any entitlement to rely upon non-disclosure by the insured with regard to the renewed contract.
INSURER'S DUTY TO INFORM OF DUTY OF DISCLOSURE
Under Section 22 of the ICA an insurer is required to inform the insured in writing of the general nature and effect of the duty of disclosure. If Section 21A (Eligible Contracts) applies, then the insurer must also inform the insured of the general nature and effect of that section. Such notice must be provided before the contract is entered into, and a failure to do so means that the insurer cannot exercise any rights unless the breach (non-disclosure) is fraudulent.
The amending legislation recognises that in some cases there may a significant time lag between the time when a prospective insured submits information to an insurer (eg. makes an application) and the time when the policy is issued. During this intervening period, circumstances may change or things may happen which need to be disclosed to the insurer. To overcome the risk of an insured innocently breaching its duty of disclosure and suffering the consequences because of the delay, the amending legislation provides that where more than two months has passed since the insured's most recent disclosure, then along with an acceptance of the proposal or a counter offer, the insurer must also provide the insured with a reminder that the duty of disclosure applies and continues right up until the time when the proposed contract is entered into. Failure to provide the reminder notice will mean that an insurer is precluded from exercising a right in respect of a failure to disclose any new matter which the insured becomes aware of.
NON-DISCLOSURE BY LIFE INSURED
The review panel recognised that contracts for life insurance are often entered into by one person to cover the life of another. The life insured may therefore be that of persons who are not the contracting insured, and therefore not subject to a duty of disclosure under the current law. Although not a contracting party, the person whose life is proposed to be insured will generally provide the insurer with information relevant to the insurer's decision on accepting and pricing the risk. At the moment Section 25 of the ICA provides that if during the negotiations a prospective life insured makes a misrepresentation, then that misrepresentation will be deemed to have been made by the contracting insured. However the ICA only deals with misrepresentations, and not non-disclosure. That gap is remedied by the amending legislation which provides that any non-disclosure by a life insured will be imputed to the contracting insured.
REMEDIES OF INSURERS – LIFE INSURANCE CONTRACTS
The amending legislation streamlines the way in which the Act deals with remedies for life insurers in cases of misrepresentation and non-disclosure made by contracting insurers and life insurers prior to entering into the contract of life insurance. The amendments are designed to make the remedies more flexible and tailored than those currently available.
A new definition of third party beneficiary has been included:-
REQUEST BY THIRD PARTY BENEFICIARIES FOR INFORMATION
Section 41 of the ICA enables an insured who has made a claim under a policy to inquire in writing of the insurer:-
- Whether the insurer admits that the policy covers the claim; and
- If so, whether the insurer proposes to conduct the defence and any negotiations relevant to the claim made against the insured.
If the insurer does not respond within a reasonable time, or does not admit liability under the contract or agree to assume conduct of the defence, then the insurer cannot refuse payment if the insured settles the claim through its own conduct of the claim and is later able to establish a liability on the part of the insurer.
The amending legislation extends the same rights to third party beneficiaries.
INSURERS DEFENCES IN ACTIONS BY THIRD PARTY BENEFICIARIES
Section 48 of the ICA deals with the defences available to a general insurer against a claim made by a third party beneficiary. Section 48AA contains similar provisions regarding certain contracts of life insurance.
When a third party beneficiary makes a claim against an insurer to do with the insurance contract, the intention of the ICA is that third party beneficiary should be in no better position than the insured. To give effect to this the amending legislation provides that in defending an action by a third party beneficiary:-
- An insurer may raise defences relating to the conduct of the insured; and
- The conduct of the insured that can be raised includes pre-contractual conduct (eg. non-disclosure).
REPRESENTATIVE ACTIONS BY ASIC ON BEHALF OF THIRD PARTY BENEFICIARIES
Section 55A of the ICA permits ASIC to bring or continue actions against insurers if such action is seen to be in the public interest. Currently the actions are limited to those brought by or on behalf of insurers in relation to breaches of the Act.
The amending legislation extends ASIC's power to bring or continue claims made against insurers by third party beneficiaries.
Section 67 of the ICA provides a mechanism for distributing money between insurer and insured that is recovered in a subrogated recovery action. The formula was subject to some criticism by the Review Panel and a new method for dividing the spoils of a successful subrogated recovery claim is set out in the amending legislation. Briefly the amending legislation provides that:-
- The party taking the recovery action should be entitled to reimbursement of the administrative and legal costs of the action from any money recovered.
- If the insurer funds the recovery action pursuant to its rights of subrogation, it is then entitled to an amount equal to that which it has paid to the insured under the contract of insurance.
- If the insured funds the recovery action, it is entitled to be paid an amount equal to that which it is owed under the contract of insurance.
- If the action is funded jointly by both insurer and insured, then they are both entitled to the amounts referred to above which are to be pro-rated in the event that there are insufficient funds to reimburse them in full.
- Any excess or windfall recovery is to be distributed in proportion to the amount contributed by each party to the administrative and legal costs of the recovery action. However, the insurer only receives the benefit of a windfall after the insured has received full recovery for its losses.
- Interest is to be divided fairly between the parties having regard to the amount each has recovered and the time that each has been deprived of the use of the subject funds.
- The amending legislation extends the provisions regarding subrogation to third party beneficiaries.
Each party's rights in relation to subrogation may be modified by the insurance contract.
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.