Australia: I Could Tell You But You Might Deny My Claim: Insurance Contracts Act 1984 (Cth) And The Duty Of Disclosure

The Australian Law Reform Commission (ALRC) was instructed by the Attorney-General in 1976 to assess the state of the law in respect of insurance contracts. Six years later the commission produced a report which canvassed the then existing common law and made specific recommendations in respect of proposed law reform. The Insurance Contracts Act 1984 (Cth) evolved from this report.

The long title of the Insurance Contracts Act 1984 (Cth) "the Act" establishes the intention of Parliament to reform and bring forward insurance contracts law to strike a balance between the insured, the insurer and the public’s interests.

Under the Act the insured’s duty of disclosure is broken into two parts. Section 21(1) concerns matters which the insured is required to disclose.

Section 21(2) covers matters which the insured is not required to disclose and section 21(3) covers an implied waiver by the insurer when they allow the insured to provide an incomplete or inadequate proposal for insurance.

Section 21(1)(a), requires the insured to disclose every matter known to them which they also know is relevant to the decision of the insurer in deciding whether or not to effect the insurance policy. The test now, is what the actual insurer in question would consider relevant rather than what a prudent insurer would regard as material under the previous common law test: Burns v MMI – CMI Insurance Ltd (1995) 8 ANZ Ins Cas 61-287.

Hodgson CJ in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529 said that particular insurer may have idiosyncrasies, but the effect on the insured’s requirement to disclose is limited by section 21. So notwithstanding the insurer’s idiosyncrasies the insured is held up to the minimum standard of what a reasonable person would know.

The insured’s duty is also extended by section 21(1)(b) to matters which a reasonable person in the circumstances of the insured would know to be relevant.

Before the Act was enacted, the ALRC believed the Insured’s duty of disclosure should extend the reasonable person test to consider the affect of the insured’s own position including education, literacy, experience and cultural background. However, the Act did not adopt the ALRC’s recommendation of "a person in the circumstances of the insured" preferring instead "a reasonable person in the circumstances".

There has been much consideration given to how much weight a Court is to put on the insured’s personal situation when considering the "reasonable person in the circumstances." Brooking J in Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919 preferred that "intrinsic factors" such as the insured’s personal circumstances (business acumen, level of education etc) should not be considered. He said that if "intrinsic factors" were considered the Court might have to factor in the position of the "reasonable simpleton". However, Brooking J believed "extrinsic factors" such as the circumstances relating to the formation of the contract of insurance should be factored in. This is the preferred view at present.

Section 21(2) provides certain factors which need not be disclosed by the insured and include:

• matters which diminish the risk of the insured event occurring;

• matters which are of common knowledge;

• a matter that the insurer knows in the ordinary course of business or ought to know; or

• a matter which is subject to the duty of disclosure but is waived by the insurer.

Under section 21(3), an insurer is considered to have waived its right for non-disclosure when the insured has either not answered a question or has failed to adequately answer the question: McLeod v SIMU Mutual Association (1987) 4 ANZ Insurance Cases 74.

That is, section 21(3) requires the insurer to actively ensure that an insured properly completes the insurance proposal.

Compliance with section 22 is a prerequisite for the insurer to be able to rely on the insured’s failure to disclose under section 21 to deny indemnity.

Section 21A and section 22 prescribes the duty of the insurer. Unless the insurer meets the prescribed requirements it is taken to have waived its right of redress for non-disclosure.

Under regulation 2B of the Insurance Contracts Regulations 1985 (Cth) eligible contracts of insurance include new contracts for motor vehicle insurance, home buildings and home contents insurance, sickness and accident insurance, consumer credit insurance and travel insurance.

Section 21A provides that the insurer must do more than advise the insured of its duty of disclosure. The insurer is obliged to pursue relevant information to assess the risk. The provisions are designed to preclude the insurer from asking all consuming rather than specific questions.

An insurer is required to inform the insured of the duty of disclosure in accordance with section 22. That is, an insurer must notify the insured, in writing, of the insured’s duty of disclosure.

If the insurer fails to comply with section 22 the insurer cannot exercise its right to deny a contract of insurance on the basis of failure to disclose, unless such failure was fraudulent.

If it is a contract under regulation 2B referred to above, the insurer must also inform the insured, in writing, of the effect of section 21A.

The insurer’s responsibility to notify applies to interim insurance contracts and renewals also. In Suncorp General Insurance Limited v Cheihk (1999) 10 ANZ Insurance Cases 75, 017 the insured was not notified that the back of the renewal certificate contained information about the duty of disclosure. The Court held that notice to the insured has to be made "clearly" in accordance with its normal English meaning and Stein JA said to clearly inform "…would convey the need for precision in the making known of the relevant duty".

An insurer is also required to inform the insured of the consequences of failure to make proper disclosure: Australian Associated Motor Insurance Ltd v Ellis (1990) 54 SASR 61.

An insurer’s remedies for non-disclosure are provided in the Act. Any other remedy generally open to the insurer is excluded.

Under section 28(1), remedies are not available to the insurer if the insurer would have entered into the contract for the same premium and on the same terms and conditions if the insured had not failed to comply with the duty of disclosure. This does not apply to fraudulent non-disclosure.

The purpose of the right to avoid a contract for fraudulent non-disclosure is to deter the public from breaching the duty of upmost good faith.

Evidence of fraud exists when it has been established that the insured gave information when they knew it was false or that the non-disclosure was made recklessly without regard to the truth.

Further, section 28(3) provides that if the insurer is entitled to avoid the contract, but does not do so, or it was not entitled to avoid the contract at all, the insurer is only able to reduce the amount of the insured’s claim by the amount required to put the insurer into the position it would have been had the failure to disclose not occurred. For example, if the insurer would have provided insurance at a higher premium, then the insurer is entitled to reduce the claim by the amount of the additional premium it would have charged.

If however the insurer would never have entered into the insurance contract at all it would only be expected to refund the premium paid by the insured. Such action puts the insurer in the position they would have been in had the contract not been entered: Duthie v Rolf H Wick & Association (Aust) Pty Ltd (1994) 8 ANZ Insurance Cases 75,446.

Whether an insurer would have entered into a contract requires the insurer to produce evidence. Documents such as office policies and underwriting guidelines would assist the insurer in providing evidence: Bauer Tonkin Insurance Brokers v CIC (1996) 9 ANZ Insurance Cases 63, 340.

Under section 31 of the Act, the Court has an overriding equitable power to disregard the avoidance of the insurance contract if to do so would be unfair and harsh and if the insurer has not been substantially prejudiced by the failure to disclose.

Special provisions apply for life insurance contracts: Section 29 the Act.

Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919.

A company entered into a contract of insurance for loss arising from fire, without disclosing to the insurer that one of its directors had previously been convicted on charges of "possession of and being knowingly concerned in the importation of cannabis resin".

The director had previously answered a question on another insurer’s proposal concerning criminal prosecutions, in a misleading manner. The Defendant insurer, was sued for failure to pay out under the contract of insurance. Nevertheless the insurer brought the case within section 21(1)(a), in that the insured failed to disclose a matter he or she knew to be relevant to the insurer’s decision on whether to take the risk. This was so notwithstanding that the proposal form did not refer to the insured’s previous convictions.

Brooking J held that in the alternative the insurer had also brought the case within section 21(1)(b), in that a reasonable person in the circumstances would have known that the matter was relevant to the insurer’s decision to provide cover.

Because the insurer was successful in establishing Sections 21(1)(a) and (b), section 28 of the Act applied. The effect of section 28(3) was to reduce the amount recoverable under the contract of insurance to nil.

In Twenty-First Maylux, the insurance policy was for the period of 6 November 1987 to 6 November 1998. The insured, who completed the policy proposal, was the company director and had previously (May 1986) entered into four insurance contracts with another insurer, Commercial Union Assurance Company of Australia Limited. These four contracts were entered into only 4 months after his release from prison.

One of the four insurance contracts with Commercial Union required the director to answer whether he had ever been prosecuted or threatened with prosecution in respect of criminal action in the previous 5 years. The "yes" box was ticked and also recorded that the director had been "convicted for possession of marijuana – 1984". This was misleading as the actual charges were more serious.

The contracts of insurance were required to be renewed in about May 1987 although at that time a different insurance broker was used, Denison Baker & Associates Pty Ltd. On that occasion the proposal for insurance contained no questions about previous convictions.

The premises of the business were moved in July 1987 and about 4 months later the defendant insurer provided a ‘Business Pac’ and the insurance policy in question. The ‘Business Pac’ contained no questions about previous convictions nor did the insurance broker verbally request such information.

Brooking J rejected the director’s evidence that he had told the broker of his previous convictions. The issue under section 21 was what the insured knows to be or what a reasonable person in the circumstances could be expected to know is a matter relevant to the insurer. Whether a conviction for a criminal offence is material in these circumstances is a question of fact according to Brooking J and evidence about its materiality is admissible but not essential.

Brooking J was convinced that the previous convictions were a matter relevant to the insurer’s decision. He accepted that the proposal would have been declined had the insurer been made aware of the extent of the director’s previous convictions. The state of mind of the director at the time of entering the insurance policy was held by Brooking J to be the cause of him giving a misleading answer. Brooking J believed the director would have realised that the proposal may have been declined if he had properly disclosed his convictions.

The director was held to have known, within the wording of section 21(1)(a), that the convictions were relevant to the decision of the insurer. The case did not need to be considered under paragraph (b). Nevertheless Brooking J held that the director would have been bound by paragraph (b) in the circumstances. This would be so even though the director claimed to be disadvantaged in comparison with other people because of his Israelii background and his education to the equivalent of year 12.

Brooking J also considered section 28. He said that there was no ready definition of fraud because at common law innocent non-disclosure gave rise to the right of the insurer to avoid the contract. He considered previous case law which suggested that the proponent must knowingly not disclose the matter concerned: Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Insurance Cases 60, 813, or on appeal Samuels JA’s finding that fraud must be a "deliberate failure to disclose": (1988) 12 NSWLR 250.

Nevertheless, Brooking J found that fraud had been established in the case because the insured failed to make a disclosure as he believed to not disclose would mean the insurer would be more likely to accept the risk.

This case concerned the disclosure prior to a renewal of vehicle insurance. The insured’s brother was involved in a car accident and sustained damage.

During the initial period of insurance (22 December 1998 to 22 December 1999) the insured had vehicle cover. In this time the insured’s brother was charged with dishonesty offences although he was never convicted.

At the time of the contract renewal, the insured’s brother was, in the opinion of the Magistrate, a regular user of the vehicle. According to an expert the insured’s brother would not have been covered if he was driving the vehicle given the charges.

The insurer rejected the claim and denied indemnity on the basis of the insured’s non-disclosure.

According to the Magistrate there was no evidence that the insured had acted fraudulently at the time of the renewal. Further the Magistrate found that the insurer’s defence should fail as the insurer had not brought the insured’s duty of disclosure properly to the attention of the insured as required by section 22.

The insured, an educated professional person, was held to have understood the terms of entering the agreement. However, section 22 required that the insurer "clearly inform" the insured of the duty and the onus of proving that it did so rests with the insurer. To inform means to make known: Lumley General Insurance Ltd v Delphin (1990) 6 ANZ InsCas 60, 986.

The insured argued that the general community would not necessarily know or understand which matters were relevant to the insurer’s decision to accept the risk. The insured also suggested that the expression provided in the contract that "Everything you know which is relevant to our decision to insure you and the terms on which we insure you" would not adequately inform the insured that it was necessary to disclose offences not related to driving a motor vehicle.

The insured’s previous disclosure of a speeding offence, according to her Barrister, suggested she was prepared to provide the information if she knew that she was supposed to.

On that basis, Balmford J held that the insurer had not clearly notified the insured in writing of her duty of disclosure at the time of entering the insurance policy and therefore the initial insurance period was valid.

Balmford J went on to consider the effect of the renewal because the brother’s accident occurred in the second period of insurance.

Upon renewal of the contract, a standard form letter and a standard form motor vehicle insurance renewal certificate was sent to the insured. The appeal court held the Magistrate was reasonably able to reach the conclusion that the insurer had not discharged its onus under section 22 of notice at the time of renewal.

As there was no evidence that the insured had acted fraudulently, the insurer was not entitled to exercise its rights under section 28(3) and deny indemnity.

An insured is expected to disclose information which would effect the decision of an insurer as to whether to offer insurance cover and if so on what terms. Insurers must facilitate disclosure by asking appropriate questions and ensuring the insured is informed of their duty.

The relationship between the insurer and the insured has become more equal with both parties having obligations to the other at the time an insurance contract is entered into or renewed. This way an insured can be confident a claim will be paid out and the insurer knows exactly what they are dealing with when assessing the risk

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