Overview
Amendments to the Insurance Contracts Act 1984 (Cth) (ICA) are underway, with the Insurance Contracts Amendment Act 2013 (Amending Act) receiving Royal Assent on Friday, 28 June 2013. There are varied commencement times for the changes, with some amending provisions not taking effect until 30 months after Royal Assent. While the amendments will provide greater clarity for insurers, a number of the changes will require modification to policy wording, business procedures and this may result in increased compliance costs for insurers, balanced against the potential for savings such as through the ability to provide Policy documents electronically.
The key amendments include the reformulation of the duties surrounding disclosure, unbundling of certain contracts of insurance and more powers for ASIC.
Revised Test for Non-disclosure
The Amending Act limits the extrinsic factors considered to assess non-disclosure by the insured. There is a move away from the subjective analysis of the “matters perceived by the insured” and toward an objective assessment of what a reasonable person in the insured’s shoes could have been expected to know was “a matter relevant to the decision of the insurer”.
Regardless of matters peculiar to the insured, a failure to disclose a matter may now also amount to a non-disclosure if it is found that a reasonable person in the circumstances could be expected to know that the matter was relevant to the insurer’s decision whether to take on the risk. Such an assessment offers greater clarity to insurers by the expected disallowance (that should now follow) of ‘peculiarities’ of the insured that in the past have been used to excuse otherwise unreasonable non-disclosure.
Extension of the duty of disclosure
Significantly, the Amending Act requires the insured to discharge the duty of disclosure before inception and each renewal of the contract for insurance.
New scope of the duty of disclosure requirements for insurers
The insurers now have a more onerous duty to notify insureds of their disclosure obligations. In particular, before both the inception and renewal of the contract of insurance, insurers must:
- Continue to inform the insured of the general nature and effect of the duty of disclosure.
- Duty: This requirement necessitates a revision of the information provided by the insurer regarding the duty of disclosure, tailored to the specific type of contract for insurance.
- Benefit: Compliance with this requirement will ensure that the insurer is protected from non-disclosure by the insured during the application process for the contract for insurance.
- Inform a potential insured under a contract of insurance of the general nature and effect of the duty of disclosure;
- Duty: This requirement necessitates identification of ‘potential’ insured by a life insurer and revision of a life insurer’s business procedures to ensure that each insured is informed of the disclosure obligations before entry or renewal of a contract for insurance.
- Benefit: Non-disclosure by a potential life insured will be imputed to the insured.
- Provide documents of previous disclosure to the insured before each renewal of the contract for insurance, requesting a response from the insured.
- Duty: This requirement will necessitate a revision of the business procedures of insurers when renewing contract of insurance.
- Benefit: Failure by the insured to provide relevant information and/or correct disclosed information provided in a previous period of risk may amount to non-disclosure.
- Pose the questions to the insured that are relevant to the insurer before each renewal of the insurance contract. Also, must refrain from using “catch all” questions:
- Duty: Specific questions must be asked of the insured, or, the insurer must ask whether there have been no changes to the information disclosed previously by the insured on entry into the contract. The insurer is to refrain from open ended questions that invite the insured to identify relevant circumstances. The burden has shifted to the insurer to probe the insured for matters which may be relevant to the insurer’s decision.
- Risk: If the insurer fails to comply, it may be taken to have waived the insured’s obligation to comply with the duty of disclosure in that regard.
New Remedies for Life Insurers
The Amending Act has broadened the remedies available to a life insurer where an insured has innocently breached their non-disclosure obligations or has misrepresented their age.
Specifically, the Amending Act has:
- Removed the life insurer’s obligation to prove it would have avoided the contract in cases of non-disclosure or innocent misrepresentation:
- The life insurer is no longer required to prove that it would not have been prepared to enter the contract if it had knowledge of a non-disclosure or innocent misrepresentation of the insured.
- Given power to life insurers to alter the expiry date of a policy of life insurance where a life insured has misrepresented their age:
- The life insurer is now permitted to change the expiry date of the policy to the date which they would have applied if the life insured had disclosed their age correctly on application for the policy.
- Removed the time frame and procedure for providing notice to a life insured who has breached their disclosure obligations or misrepresented their age:
- A life insurer may now inform the life insured in writing of a variation to their life insurance contract at any time, if they have innocently breached their disclosure obligations or misrepresented their age, if knowledge of those facts prior to entry into the contract would have changed the life insurer’s position.
- Also, the life insurer is now no longer required to provide to the life insured notice of any proposed variations within three years of the inception of the policy.
Unbundling Life Insurance Contracts
The Amending Act has altered how certain life insurance contracts are to be treated. Specifically:
- contracts of life insurance involving two or more groups of provisions will now be unbundled. The Amending Act will treat each group as a separate contract of life insurance;
- if the contract of life insurance provides cover to two or more individuals, there will now be a separate contract for each life insured;
- any provisions applicable to one or more of the groups will now be seen to be applicable to each of those groups; and
- the fact that life insurance contracts will be unbundled now means that the life insurers will be entitled to different remedies.
Third Parties Under Life Insurance Contracts
The Amending Act has altered the position of third party beneficiaries who are not the insured under the contract of life insurance by introducing new circumstances allowing life insurers to refuse indemnity to third party beneficiaries.
Life insurers can rely on the conduct of the life insured to defeat a claim brought by a third party beneficiary:
- Greater clarity is now provided to life insurers by the Amending Act which provides that a life insurer can refuse indemnity to a third party beneficiary who is not the insured under a contract of life insurance, if it would have denied such indemnity to the insured.
- Furthermore, life insurers are now equipped with the power to refuse third party beneficiaries indemnity if they do not comply with the same obligations owed to the life insurer by the life insured.
ASIC’s New Role
The Amending Act has broadened ASIC’s powers to allow intervention in circumstances where an insurer has breached its duty to act with ‘utmost good faith’.
New remedies where an insurer has breached its duty of utmost good faith:
- ASIC may now issue a ban under the Corporations Act 2001 (Cth); and/or
- cancel the insurer’s financial service license; and/or
- impose additional conditions to obtain renewal of a license.
- Risk: The failure by an insurer to act with ‘utmost good faith’ in the handling of a claim or potential claim will now amount to a breach of the Corporations Act 2001. This is applicable to all contracts of insurance, including general and life insurance contracts. Insurers must be wary that ASIC can intervene and take the above action, and must do everything possible to ensure this duty is upheld.
Electronic Service
The Amending Act also provides for the service of written notices electronically.
This has the potential to save insurers significant sums in printing the postage costs. The flipside to this will be the need to establish adequate systems to prove provision of policy documents electronically, particularly in relation to reliance on section 35 of the Insurance Contracts Act 1984 and the requirement to clearly inform the insured in writing of certain provisions.
Conclusion
The above changes are significant and will require insurers to amend their current policies and procedures to not only ensure compliance with, but also to fulfill the full potential benefits of, the provisions of the Insurance Contracts Act 1984, as they are amended.
We look forward to working with our insurer clients in achieving this.
