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2008-2009-2010
the parliament of the commonwealth of australia
HOUSE OF REPRESENTATIVES
INSURANCE CONTRACTS AMENDMENT BILL 2010
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Financial Services,
Superannuation and Corporate Law, the Hon Chris Bowen MP)
Table of Contents
Glossary 1
General outline and financial impact 3
Chapter 1 Notes on clauses 9
Chapter 2 Regulation impact statement 41
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|ALRC |Australian Law Reform Commission |
|ASIC |Australian Securities and Investments|
| |Commission |
|Bill |Insurance Contracts Amendment Bill |
| |2010 |
|ET Act |Electronic Transactions Act 1999 |
|IC Act |Insurance Contracts Act 1984 |
|Review Panel |The Panel appointed to review the IC |
| |Act |
General outline and financial impact
Outline
1. The Insurance Contracts Amendment Bill 2010 (the Bill) arose out of
recommendations made by a review of the Insurance Contracts Act
1984 (the IC Act). This review was conducted by a Panel comprising
Mr Alan Cameron AM and Ms Nancy Milne (the Review Panel). The
Review Panel's main conclusion was that the IC Act was generally
working satisfactorily to the benefit of insurers and insureds.
However, the Review Panel found that some changes would be
beneficial, given the passage of time since the Act was originally
enacted, developments in the insurance market since that time and
judicial interpretation of IC Act provisions.
2. The Review Panel made detailed recommendations for changes to the
IC Act to address issues that had been identified as arising from
the above factors. This Bill gives effect to a number of the
Review Panel's recommendations. In several areas the Review
Panel's recommended approach was modified to take account of
subsequent consultations with stakeholders on the details of the
proposed amendments.
Major elements
3. The following is a brief summary of the measures included in the
Bill, outlined under their particular Schedule number.
Schedule 1 - Scope and application
4. Schedule 1 to the Bill contains amendments that relate to the scope
and application of the IC Act. It amends the IC Act so that:
. failure to comply with the duty of utmost good faith is a
breach of the IC 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 IC 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 IC Act as well as cover that falls
under the IC Act, are treated as exempt from the Act only
in respect of the exempt elements.
Date of effect: On Royal Assent.
Schedule 2 - Electronic communication
5. It is proposed that the regulations under the Electronic
Transactions Act 1999 will be amended so that the IC Act will no
longer be exempt from that Act. Schedule 2 to the Bill amends the
IC Act to make technical changes to provisions in the IC Act
regarding the giving of notices, documents and information,
including a note that the Electronic Transactions Act will apply to
permit electronic communication of notices or documents required to
be given in writing.
Date of effect: Schedule 2 will take effect on a day to be fixed
by Proclamation. This will permit coordination of the commencement
with the proposed amendment to the Electronic Transactions
Regulations.
Schedule 3 - Powers of ASIC
6. Schedule 3 to the Bill amends the IC Act to give the Australian
Securities and Investments Commission (ASIC) a statutory right to
intervene in any proceeding relating to matters arising under the
IC Act and under Part 3 of the Medical Indemnity (Prudential
Supervision and Product Standards) Act 2003.
Date of effect: On Royal Assent.
Schedule 4 - Disclosure and misrepresentations
7. Schedule 4 to the Bill amends the IC Act so that:
. the mixed objective/subjective test in section 21 of the
IC Act, which is used to determine if an insured has met
their duty of disclosure, is clarified;
. the requirement to ask proposed insureds specific
questions 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), and 'catch all' questions
will no longer be permitted;
. 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 IC 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; and
. 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;
. a failure to disclose by the proposed life insured will
be imputed to the insured.
Date of effect: The amendments take effect 18 months after the date
of Royal Assent. This delay in commencement is to allow insurers
an opportunity to amend their business practices in response to the
new rules regarding the operation of the duty of disclosure and
notification of that duty.
Schedule 5 - Remedies of insurers: life insurance contracts
8. The IC Act contains provisions that prescribe remedies for insurers
that may be used where a person who became insured under a contract
of insurance either misrepresented or did not disclose matters that
should have been disclosed prior to entering into the contract.
Section 28 deals with general insurance and section 29 deals with
life insurance.
9. In some cases, the remedies in respect of bundled contracts of life
insurance are inappropriate. Schedule 5 to the Bill amends the IC
Act so that:
. 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 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
. the statutory framework in the IC Act for 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).
Date of effect: The amendments regarding unbundling of life
insurance contracts and entitlement of insurers to change
expiration dates and to cancel contracts of life insurance take
effect on Royal Assent. The amendments regarding changes to the
remedies for particular contracts of life insurance commence 12
months after the date of Royal Assent. The delay in commencement
is to allow insurers an opportunity to factor into their affairs
the changes to available remedies.
Schedule 6 - Third parties
10. Schedule 6 to the Bill amends the IC Act so that:
. individuals who have rights under a contract of insurance
('third party beneficiaries') but who are not the insured,
have access to particular rights and obligations currently
held by insureds;
. 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 takes effect.
Date of effect: ASIC's powers to bring representative actions
commence on the date of Royal Assent. The remainder of Schedule 6
commences 12 months after the date of Royal Assent. The delay in
commencement is to allow insurers a reasonable opportunity to
factor the new rights and obligations of third party beneficiaries
into their business operations.
Schedule 8 - Subrogation
11. Schedule 7 to the Bill amends the IC Act so that:
. section 67 of the IC 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 IC Act, which relates to subrogation,
applies to claims made by third party beneficiaries as
well as by insureds.
Date of effect: Schedule 7 commences six months after the date of
Royal Assent. The delay in commencement is to allow insurers an
opportunity to factor the new rules regarding subrogation into
their business operations.
Financial impact statement
12. The Insurance Contracts Amendment Bill 2010 will have no financial
impact on the Commonwealth.
Chapter 1
Notes on clauses
Schedule 1 - Scope and application
13. Schedule 1 to the Bill contains a range of provisions to change
and/or clarify the scope and application of the IC Act. The
provisions relate to:
. breaches of implied terms and the duty of utmost good
faith (including extending the duty to third party
beneficiaries);
. including a definition of 'third party beneficiary';
. exemptions for 'bundled' workers' compensation contracts;
and
. application of exemptions to 'bundled' contracts
generally.
Part 1 - Duty of utmost good faith
Breach of the duty of utmost good faith
14. There is implied into all contracts of insurance, pursuant to
section 13 of the IC Act, a provision that requires each party to
that contract of insurance to act with the utmost good faith
towards the other party in respect of any matters arising under or
in relation to the contract.
15. Under the current law, parties to a contract of insurance may
enforce compliance with this implied duty of utmost good faith
through private legal action. However, this may present too great
an expense for some parties and does not provide long-term
solutions to systemic breaches of utmost good faith committed over
time.
16. Item 4 in Part 1 of Schedule 1 inserts a subsection (2) in
section 13 of the IC Act to address this issue by making a breach
of the duty of utmost good faith a breach of the IC Act. The
amendment allows ASIC to commence or continue representative action
on behalf of an insured against an insurer, pursuant to section 55A
of the IC Act. Pre-conditions to ASIC undertaking representative
action on behalf of an insured are that the insured or insureds
have suffered damage or there has been a breach of the IC Act.
17. The amendments to section 13 will also have the result that
breaches of the duty of utmost good faith (and consequently of the
IC Act) by an insurer may enable ASIC to access various remedies
under the Corporations Act 2001 in relation to Australian Financial
Services Licence holders. These remedies include a banning order
under section 920A of the Corporations Act, suspension or
cancellation of the insurer's financial services licence, the
imposition of conditions on the licence or the acceptance of an
enforceable undertaking not to act in a particular manner. Item 5
will insert new section 14A in the IC Act, to avoid any doubt that
the remedies are available for breaches of the duty of utmost good
faith by an insurer in the handling or settlement of a potential
claim. Arguably, regulations made under the Corporations Act in
relation to the treatment of claims handling and settlement for the
purposes of Chapter 7 of the Corporations Act may imply otherwise.
18. Banning orders made by ASIC have the effect of prohibiting the
affected person from providing all financial services, or one or
more specified types of financial service. They may be permanent
or last only for a specified period. An example of the type of
conduct leading to a permanent banning order is a pattern of
persistent contraventions that indicate systemic failures or a
general lack of understanding of, and regard for, compliance.
Isolated breaches of the duty would not be expected to result in
ASIC pursuing a banning order.
19. A breach of the IC Act for failure to comply with the duty of
utmost good faith implied into all contracts of insurance is not an
offence against the IC Act, nor does it attract any penalty under
the IC Act.
Third party beneficiaries
20. Third party beneficiaries are not the insured under a contract of
insurance but may be specified or referred to in its terms, either
individually or as part of a class, as persons to whom any benefits
provided by the contract extend. It follows therefore that they
should have access to some of the rights and obligations under the
IC Act that extend to insureds.
21. As third party beneficiaries are not parties to the contract of
insurance, they do not benefit from the duty of utmost good faith,
which is implied by the current section 13.
22. New subsections 13(3) and 13(4) (see item 4 in Part 1 of
Schedule 1) address this by extending the duty of utmost good faith
to third party beneficiaries; however, the duty only commences
after the contract is entered into. This is because applying the
duty pre-contractually would be impractical. Further, the duty of
utmost good faith will be of most relevance for third party
beneficiaries where they wish to make a claim under a contract of
insurance, as countenanced by subsection 48(2).
23. Item 2 of Part 1 of Schedule 1 inserts a definition of 'third party
beneficiary' in subsection 11(1) of the IC Act.
Application
24. By operation of item 6 in Part 1 of Schedule 1, the amendments in
Part 1 apply as follows:
a) to a contract of insurance that was originally entered into
after the commencement of item 6;
b) to a contract of general insurance that was originally entered
into before the commencement of item 6 and is renewed after
that commencement; and
c) if the contract is a contract of life insurance that was
originally entered into before the commencement of this item
and is varied after that commencement to increase a sum
insured under the contract, or to increase the number of life
insureds under the contract, or to provide one or more
additional kinds of cover; then the contract is treated, to
the extent of the variation, as if it had been originally
entered into after the commencement of item 6, and the
amendments apply to the contract to the extent of the
variation.
25. By operation of clause 2 of the Bill, item 6 in Part 1 of
Schedule 1 commences on the day the Act receives the Royal Assent.
Part 2 - 'Bundled' workers' compensation contracts
26. Paragraph 9(1)(e) of the IC Act exempts from the scope of the Act
actual or proposed contracts of insurance that have been entered
for the purposes of a state or territory law that relates to
workers' compensation or compensation for death or injury to a
person arising from the use of a motor vehicle.
27. In practice, some contracts of insurance offer employees cover of
the type described in paragraph 9(1)(e) and another type of cover.
A particular example is contracts of insurance that bundle both
cover for compulsory workers' compensation purposes and cover for
liability to employees at common law arising from employment-
related personal injury.
28. The question arises as to whether such 'bundled' contracts of
insurance are exempt or not from the scope of the IC Act. The
Review Panel recommended that, in the case of the example described
above, the most effective solution to overcome uncertainty about
application is to make the entire contract exempt from the scope of
the IC Act. In other examples of contracts of insurance that
bundle exempt and non-exempt types of cover, the Review Panel
considered it not desirable to rule the entire contract either in
or out of the scope of the Act. That situation is dealt with in
Part 3 of Schedule 1.
29. Item 7 in Part 2 of Schedule 1 includes a new paragraph 9(1)(f)
that exempts from the operation of the IC Act insurance contracts
entered into (or proposed to be entered into) that bundle
compulsory workers' compensation cover together with cover for an
employer's liability at common law for damage suffered due to
employment-related personal injury.
30. By operation of item 8 in Part 2 of Schedule 1, the amendments in
Part 2 apply as follows:
a) to a contract of insurance that was originally entered into
after the commencement of item 8; and
d) to a contract of general insurance that was originally entered
into before the commencement of item 8 and is renewed after
that commencement.
31. By operation of clause 2, item 8 in Part 2 of Schedule 1 commences
on the day the Act receives the Royal Assent.
Part 3 - 'Bundled' contracts generally
32. A contract of insurance may contain one or more types of cover to
which the IC Act would not apply if they were contained in
individual contracts, together with one or more types of cover to
which the IC Act would apply if they were contained in individual
contracts.
33. As was the case for the bundled contracts of insurance dealt with
specifically in Part 2 of Schedule 1 described above, the Review
Panel recommended that the exemption from the scope of the IC Act
in subsection 9(1) of the Act be applied to each type of cover in a
bundled insurance policy as if it were a separate contract.
34. Item 9 in Part 3 of Schedule 1 inserts new subsections 9(1A), 9(1B)
and 9(1C). Under the new subsections, contracts of insurance that
contain more than one type of cover, one of which is exempted and
one of which is not (for this discussion called Cover A and Cover B
respectively), would contain some terms that relate solely to Cover
A, some that relate solely to Cover B and some that relate to both
Cover A and Cover B.
35. To create 'unbundled' contracts for the purposes of applying the
exemption provisions, two notional contracts would be constructed.
The first notional contract would comprise only those terms of the
initial contract that are relevant to Cover A. The notional
contract would also contain, as a consequence of subsection 9(1C),
any terms of the initial contract that are relevant to both Cover A
and Cover B.
36. Similarly, the second notional contract would comprise those terms
of the initial contract that are relevant to Cover B only and the
terms that are relevant to both Cover A and Cover B.
37. When the contents of the notional contracts are determined, the
exemption provisions in subsection 9(1) are applied to each as if
that contract were a separate contract of insurance or proposed
contract of insurance.
38. It may be that there are more than two types of cover bundled
within a contract of insurance, in which case more than two
notional contracts of insurance will need to be developed at the
first stage. However, irrespective of whether there are two or
more kinds of exempt covers, or two or more kinds of non-exempt
covers, or both, the result of applying the unbundling process in
subsections 9(1A) and 9(1C) is that only those contractual terms
that relate to the exempt cover type(s) are exempt from the
operation of the IC Act.
39. New subsection 9(1B) applies a different rule for unbundling if one
of the types of cover is a cover that is referred to in new
paragraph 9(1)(f) (described in paragraph 3.17 above). This
different treatment is necessary to ensure that directors'
liability cover (subparagraph 9(1)(f)(ii)) would only be exempted
from the scope of the IC Act where it was bundled with compulsory
workers' compensation cover (subparagraph 9(1)(f)(i)).
40. By operation of item 10 in Part 3 of Schedule 1, the amendments
made by Part 3 apply as follows:
a) to a contract of insurance that was originally entered into
after the commencement of item 8 (the day the Act receives the
Royal Assent);
b) to a contract of general insurance that was originally entered
into before the commencement of item 10 and is renewed after
that commencement; and
c) if the contract is a contract of life insurance that was
originally entered into before the commencement of item 10 and
is varied after that commencement to increase a sum insured
under the contract, or to increase the number of life insureds
under the contract, or to provide one or more additional kinds
of cover; then the contract is treated, to the extent of the
variation, as if it had been originally entered into after the
commencement of this item, and the amendments apply to the
contract to the extent of the variation.
41. By operation of clause 2, item 10 in Part 3 of Schedule 1 commences
on the day the Act receives the Royal Assent.
Schedule 2 - Electronic communication
42. The Review Panel analysed the increasing use of electronic
communications in the context of the IC Act. Currently, the IC Act
is exempt from the coverage of most of the operative parts of the
Electronic Transactions Act 1999 (the ET Act), which provides that,
in general, where a Commonwealth law requires a notice to be given
in writing, then it may be given by electronic communication if
certain conditions are met.
43. For example, subsection 9(1) of the ET Act provides that any
communication required by a Commonwealth Act may only be done
electronically if:
. at the time the information was given, it was reasonable
to expect that the information would be readily accessible
so as to be useable for subsequent reference; and
. the person to whom the information is required to be given
consents to the information being given by way of
electronic communication.
44. Section 14 of the ET Act contains rules about time and place of
receipt and dispatch of electronic communications.
45. The Review Panel expressed support for the notion of updating the
IC Act to allow for communication by electronic means. A proposed
amendment to the Electronic Transactions Regulations 2000 is
expected to remove the current exemption, so that communications
under the IC Act are subject to the ET Act. Schedule 2 to the Bill
amends various provisions of the IC Act to recognise that the IC
Act will be subject to the ET Act.
46. For the sake of consistency of terms in sections 70, 71 and 72 of
the IC Act dealing with notices, items 2 to 6 of Schedule 2 remove
references to 'statement' (wherever occurring). The concept of a
'statement' is covered by the term 'notice or other document'.
47. Item 7 of Schedule 2 repeals the current section 72 of the IC Act
(which is concerned with legibility of writing) and substitutes an
expanded section 72. The purpose of this expansion is so that the
regulation-making power in section 72 may deal not only with the
content and legibility of the notice or other document itself, but
also with material that may accompany the notice or other document
or information. The power is intended to permit the making of
regulations to ensure that the content of statutory notices under
the IC Act is able to be digested by the recipient without
interruption or distraction by other material provided with the
notice.
48. Current section 77 of the IC Act applies generally in relation to
notices or other documents or information that are required or
permitted to be given by the IC Act. The section sets out the
methods that may be used depending on whether the person to whom
the notice or other document is to be given is a body corporate or
a natural person. Subsection 77(2) also includes a rule regarding
the time of receipt of a notice of cancellation of a contract of
insurance.
49. Item 8 of Schedule 2 repeals current section 77 of the IC Act and
Item 1 is a consequential amendment to subsection 62(1). Item 7
largely replicates the content of section 77 as new section 72A,
but removes the rule regarding notice by post of cancellation.
Section 29 of the Acts Interpretation Act 1909 deals with that
subject. Section 72A is not intended to affect the operation of
subsection 71(1), which covers situations where insurance is
arranged by brokers acting for the insureds.
Application
50. By operation of item 9 of Schedule 2, the amendments in Schedule 2
apply to a notice or other document or information given to a
person under the IC Act after the commencement of item 9 of
Schedule 2.
51. By operation of clause 2, item 9 of Schedule 2 commences on the day
the Act receives the Royal Assent.
Schedule 3 - Powers of ASIC
52. Part IA of the IC Act gives the Australian Securities and
Investments Commission (ASIC) responsibility for the general
administration of the IC Act and vests in ASIC a number of specific
powers to support this role, such as the power to obtain documents.
53. Item 1 of Schedule 3 inserts a new section 11F into the IC Act that
gives ASIC powers to intervene in matters arising under the Act.
The provision is similar in form to the existing power that ASIC
has to intervene in proceedings begun by other persons about
matters arising under the Corporations Act 2001 (section 1330). It
allows ASIC to be represented in the proceedings by a staff member,
a delegate, a solicitor or counsel.
54. By new section 11F, ASIC may also intervene in a matter arising
under Part 3 of the Medical Indemnity (Prudential Supervision and
Product Standards) Act 2003. Part 3 of the Medical Indemnity
(Prudential Supervision and Product Standards) Act 2003 enables
ASIC (and also other parties) to make application to the court to
enforce product standards for medical indemnity insurance. The
expanded power would enable ASIC to intervene in any proceeding
relating to matters arising under Part 3.
Application
55. By operation of item 2 of Schedule 3, the amendment made by
Schedule 3 applies to a proceeding that is commenced after the
commencement of item 2.
56. By operation of clause 2, item 2 of Schedule 3 commences on the day
the Act receives the Royal Assent.
Schedule 4 - Disclosure and misrepresentations
57. Schedule 4 amends the manner in which the IC Act deals with
particular types of disclosure and misrepresentations. The
changes:
. clarify how the duty of disclosure test is applied;
. in relation to eligible contracts of insurance, amend the
law to make the duty of disclosure apply on renewal of a
contract of insurance and remove the option for insurers
to ask 'catch all' questions';
. amend the law regarding circumstances in which an insurer
must provide an insured with a reminder as to when their
duty of disclosure obligation applies; and
. in relation to contracts of life insurance, amend the law
so insurers must give a potential life insured, who is not
the insured under the relevant contract of insurance,
notice of their duty of disclosure.
58. The changes made by Schedule 4 will require insurers to adjust
various their business practices. This will take time to
implement. Accordingly, the commencement of Schedule 4 is delayed
by 18 months from Royal Assent in order to allow insurers time to
implement the necessary changes to their systems and documents as
required.
Part 1 - Insured's duty of disclosure
59. Sections 21 and 21A of the IC Act are key provisions that govern
the insured's duty of disclosure obligations. Section 21 imposes a
requirement on an insured, before a contract is entered into, to
disclose various matters. What must be disclosed is determined by
reference to a test that contains both subjective elements (what
the insured knows to be relevant to the insurer's decision) and
objective elements (what a reasonable person in the circumstances
could be expected to know would be relevant to the insurer's
decision).
60. The mixed subjective/objective test has not been applied
consistently. To help clarify its interpretation, item 1 in Part 1
of Schedule 4 expands the objective element of the test in
paragraph 21(1)(b) of the IC Act to include a non-exclusive factor
to which the court may have regard when determining whether a
reasonable person in the circumstances could be expected to know a
matter was relevant to the decision of the insurer whether to enter
the contract of insurance. The factor is the nature and extent of
the insurance cover to be provided under the relevant contract of
insurance.
Application
61. By operation of item 2 in Part 1 of Schedule 4, the amendment in
Part 1 of Schedule 4 applies as follows:
a) to a contract of insurance that was originally entered into
after the commencement of item 2;
b) to a contract of general insurance that was originally entered
into before the commencement of item 2 and is renewed after
that commencement; and
c) if a contract is a contract of life insurance that was
originally entered into before the commencement of item 2 and
is varied after that commencement to increase a sum insured
under the contract, or to increase the number of life insureds
under the contract, or to provide one or more additional kinds
of cover; then the contract is treated, to the extent of the
variation, as if it had been originally entered into after the
commencement of this item, and the amendment applies to the
contract to the extent of the variation.
62. By operation of clause 2, item 2 in Part 1 of Schedule 4 commences
on the day after the end of the period of 18 months beginning on
the day the Act receives the Royal Assent.
Part 2 - Eligible contracts of insurance
63. Section 21A of the IC Act supplements the general provisions
regarding the duty of disclosure in section 21, but only in
relation to certain 'eligible contracts of insurance'. 'Eligible
contracts of insurance' are prescribed by regulations made under
the IC Act. They include contracts that provide cover commonly
sought by individual consumers, such as motor vehicle, home
contents and travel insurance.
64. For an insurer to be able to rely on compliance by an insured with
their duty of disclosure, section 21A requires the insurer to ask
the insured specific questions that are relevant to the insurer's
decision whether to accept the risk and, if so, on what terms.
However, it is also currently permissible for the insurer to ask
the insured a 'catch all' question, which requires an insured to
disclose 'exceptional circumstances' that a reasonable person could
be expected to know would be relevant to the insurer's decision
whether to accept the risk, and about which would be unreasonable
for the insurer to ask a specific question (subparagraph
21A(4)(b)(iii)). The current ability to ask 'catch all' questions
tends to undermine the benefits for insureds of the framework for
eligible contracts of insurance. Insurers should be in a position
to decide what matters are material to their decision to provide
eligible contracts of insurance and formulate specific questions
accordingly. In the event that an insurer is unable to foresee a
matter that is relevant to their decision whether to accept the
risk of a particular contract, then it is difficult to justify
expecting an unsophisticated insured to realise its relevance.
65. Section 21A only applies when a contract is first entered into - it
currently has no application to renewals (subsection 21A(1)).
However, for the purposes of other provisions, a renewal is treated
as entry into a new contract (subsection 11(9)). Accordingly,
renewal of an eligible contract of insurance would trigger the
general duty of disclosure provisions under section 21. This can
be onerous for insureds in comparison with, for example, the
framework for eligible contracts under section 21A.
66. The provisions in Part 2 of Schedule 4 are designed to:
. remove the ability of insurers to ask 'catch all'
questions in relation to eligible contracts; and
. apply enhanced rules for the duty of disclosure on
original inception and renewal of eligible contracts.
67. Item 4 in Part 2 of Schedule 4 substitutes a new section 21A and
inserts a new section 21B.
68. In relation to the original entering into of an eligible contract
of insurance, new section 21A provides that the insurer is required
to ask the insured to answer one or more specific questions that
are relevant to the insurer's decision whether or not to accept the
risk, and is taken to have waived compliance with the insured's
duty of disclosure if it does not do so. Further, asking 'catch
all' questions covering any other matter outside the specific
requests will result in a waiver of the duty of disclosure with
respect to the other matters. The operation of new section 21A is
not triggered by a variation, reinstatement or extension of a
contract of insurance.
69. New section 21B applies in relation to the renewal of an eligible
contract of insurance (new subsection 21B(1)). New subsections
21B(2) to (5) deal with the position of the insurer - in particular
in what circumstances they are taken to have waived compliance with
the duty of disclosure. In relation to the renewal of an eligible
contract of insurance, new section 21B(2) requires an insurer
wishing to rely on the insured's duty of disclosure to:
. ask specific questions, just as they may on the original
entering into of a contract; and/or
. provide the insured, prior to renewing the contract, with
a copy of any matters previously disclosed by the insured
in relation to the contract, and request the insured to
disclose any changes to those matters or to indicate if
there are no such changes.
If the insurer does neither of those things, new subsection 21B(3)
provides that they are taken to have waived compliance with the
duty of disclosure in relation to the renewed contract (subject to
new subsection 21B(11), which deals with the effects of non-
disclosures and misrepresentations that occurred on previous
renewals or original inception).
70. New subsections 21B(4) and 21B(5) deal with 'catch all' questions.
Asking 'catch all' questions covering other matters addition to
asking specific questions and/or seeking updates to information
previously disclosed will result in waiver of compliance with the
duty of disclosure with respect to the other matters.
71. New subsections 21B(6) to (8) deal with the position of the insured
- in particular, in what circumstances they are taken to have
complied with the duty of disclosure.
72. Subsection 21B(6) deals with an insured who is only asked specific
questions. In that case, to be taken to have complied with the
duty of disclosure in relation to the renewed contract if they
disclose, in response to each specific question, matters that are
known to them and matters that a reasonable person in the
circumstances would be expected to have disclosed in answer to the
question.
73. Subsection 21B(7) deals with an insured who is only asked to update
matters previously disclosed. In that case, to be taken to have
complied with the duty of disclosure in relation to the renewed
contract the insured must disclose any change to the matter or
inform the insurer if there is no change.
74. Subsection 21B(8) deals with an insured who is both asked specific
questions and asked to update answers previously provided. In that
case, the insured must both disclose responses to the specific
questions (similar to the requirements of subsection 21B(6)) and
advise the insurer of any change/no change to the matters (similar
to the requirements of subsection 21B(7)).
75. Subsections 21B(6) to 21B(8) are all subject to new
subsection 21B(11), which provides that compliance by an insured
with the duty of disclosure on a renewal does not mean that a
failure to comply with the duty of disclosure on original inception
or a previous renewal is negated. For example, suppose when
originally applying for a home buildings policy, an insured
breaches the duty of disclosure in relation to providing
information on the main construction materials used in the home.
At a subsequent renewal, the insurer seeks updates to various
matters but does not ask the insured to update the information
previously provided on main construction materials, because they
are unlikely to change between inception and renewal. In such a
case, even though the insured may be taken to comply with the duty
of disclosure in respect of the renewed contract by providing all
updates as requested, the effect of subsection 21B(11) is that
compliance with the duty under the renewed contract does not
operate to negate the earlier failure. The intention of this
provision is to permit insurers to continue to rely on the
accuracy, as at the time of inception or the previous renewal, of
matters disclosed on inception and previous renewals. Otherwise,
insurers seeking to rely on any information previously provided by
an insured (such as, for example, what a home is constructed of)
would need to seek updates to every such matter at every renewal,
which would be onerous and time consuming for both insurers and
insureds. For the sake of clarity, the rule in subsection 21B(11)
should not be taken to imply that an insured who has complied with
the duty of disclosure previously is under a continuing obligation
to update matters that have changed at renewal, unless specifically
requested to do so. If an insurer wishes to ensure that
information is updated at renewal, they will need to either ask the
insured a specific question regarding the matter, or ask the
insured to update the information previously provided.
76. Some insureds may not respond to request to update matters
previously provided, but nevertheless pay the renewal premium. If
an insurer seeks an update to a matters previously provided but the
insured provides no response before the contract is renewed, then
new subsection 21B(9) operates so that the insured is taken to have
advised the insurer that there is no change to the matter. New
subsection 21B(10) disapplies the provisions of subsections 21(3)
and 27, which would otherwise provide for some consequences of an
insured's failure to answer questions. Subsection 21B(10) also
applies if the insured advises the insurer that there is no change
to a matter.
Application
77. By operation of subitem 4(1) in Part 2 of Schedule 4, the
amendments in Schedule 4 relating to the insertion of proposed new
section 21A apply to an eligible contract of insurance originally
entered into after the commencement of item 3.
78. By operation of subitem 4(2), the amendments in Schedule 4 relating
to the insertion of proposed new section 21B apply to an eligible
contract of insurance that is renewed after the commencement of
item 3, regardless of when the contract was originally entered
into.
79. By operation of clause 2, item 3 in Part 2 of Schedule 4 commences
on the day after the end of the period of 18 months beginning on
the day the Act receives the Royal Assent.
Saving of regulations
80. Item 5 in Part 2 of Schedule 4 provides for the saving of existing
regulations made for the purpose of the definition of 'eligible
contract of insurance' in current subsection 21A(9), as if they had
been made for the purposes of the definition of 'eligible contract
of insurance' (as inserted in subsection 21A(6)). By operation of
item 3 in Part 2 of Schedule 4, the definition of 'eligible
contract of insurance' is inserted in subsection 21A(6) of the IC
Act.
Part 3 - Insurers' duty to inform of duty of disclosure
Notification that the duty exists until contract begins
81. The insured has a duty of disclosure until the time at which the
relevant contract of insurance is entered into. In normal
circumstances this presents no difficulty because the insured
provides information to the insurer a short time before the
contract begins. This is not always the case.
82. In some instances, particularly where long term contracts of life
insurance are involved, there may be a significant time lag
(sometimes months) between the time a prospective insured submits
information to an insurer - usually when making an application -
and the time the policy is actually issued. During this period,
circumstances may change, or events may occur, that need to be
disclosed to the insurer in order for the insured to comply with
the duty of disclosure.
83. If the insured fails to disclose those circumstances or events
before the contract is entered into, then any claim they later make
could be at risk due to their failure to comply with the duty of
disclosure. The Review Panel recommended, in order to minimise the
possibility of harsh outcomes, that prospective insureds should be
reminded that the duty of disclosure extends until the time the
relevant policy is entered into.
84. Current subsection 22(1) of the IC Act requires insurers to notify
insureds about the duty of disclosure any time 'before the contract
is entered into'. Item 8 in Part 3 of Schedule 4 substitutes a new
section 22, providing that the insurer must clearly inform the
insured of the general nature and effect of the duty of disclosure,
and where relevant, the general nature and effect of sections 21A
or 21B.
85. New subsection 22(2) requires insurers to inform proposed life
insureds that they have a duty of disclosure. This includes
information on the effect of proposed new section 31A (see below).
Item 6 in Part 3 of Schedule 4 provides that the definition of a
'life insured' includes a proposed life insured.
86. New subsection 22(1) also makes it clear that any notification
given to the insured pursuant to the section should explain that
the duty of disclosure obligation applies until the time that the
proposed contract is entered into (Item 8 in Part 3 of Schedule 4).
87. Item 8 also provides in new subsection 22(3) that where the
insurer's acceptance, or counter-offer, in relation to the proposed
contract of insurance, is made more than two months after the
insured's most recent disclosure for the purposes of complying with
their duty of disclosure, then along with the acceptance or counter-
offer, the insurer must also provide the insured with a reminder
that the duty of disclosure applies until the proposed contract
(or, in the case of a counter-offer, the other contract) is entered
into.
88. The addition of this reminder requirement in cases where there is a
significant delay between the initial disclosure and the contract
commencing is intended to promote disclosures being made current as
at the contract date, so that the insurer is fully informed, and
there can be an early renegotiation of the contract if necessary.
89. The additional reminder requirement imposed by new subsection 22(3)
is not extended to a life insured, unless the life insured is also
the contracting insured.
90. Item 8 in Part 3 of Schedule 4 provides under new subsection 22(4)
that the form of writing used to inform a person of the matters
referred to in subsection 22(1), and also for the reminder notice
referred to in subsection 22(3), may be in accordance with the
prescribed form, where the regulations prescribe a form of writing
to be used for the purposes of section 22.
91. New subsection 22(5) applies such that an insurer that fails to
comply with subsection 22(1) and, if applicable, subsection 22(2)
will be precluded from exercising a right in respect of a failure
by the insured to comply with their duty of disclosure under the
contract, unless the particular failure is fraudulent. This is
consistent with the current position in respect of insureds.
92. New subsection 22(6) and (7) deals with an insurer that fails to
comply with subsection 22(3), which is the provision requiring a
reminder notice in cases of delay between initial disclosure and
the contract commencing. In those circumstances, the insurer is
precluded from exercising a right in respect of a failure to
disclose any 'new matter', defined as a matter that the insured
first become aware of after their most recent disclosure (and
which, therefore, may not have been disclosed as a result of the
failure to provide the reminder notice).
93. Item 7 in Part 3 of Schedule 4 amends paragraph 11(10)(b) of the IC
Act with the effect that section 22 (in the case of both general
and life insurance) and section 40 (in the case of general
insurance) does not require an insurer to give information to the
insured at or before a variation of the relevant contract of
insurance, except where the variation is involved in a renewal,
extension or reinstatement of the contract, or if the varied
contract will provide a kind of insurance cover that was not
provided by the contract immediately before the variation. Section
22 will also continue to apply in the case of variation of a
contract of life insurance if the variation will increase a sum
insured in respect of the insured.
94. Subsection 11(10) operates notwithstanding subsection 11(9) of the
IC Act, which provides that a reference in the Act to the 'entering
into' of a contract of insurance includes a reference to, in the
case of life insurance, the making of an agreement by the parties
to extend or vary the contract, and in the case of any other
contract of insurance, the making of an agreement by the parties to
the contract to renew, extend or vary the contract, or to the
reinstatement of any previous contract.
95. Under paragraph 11(10)(a) or (b) (as amended), the insurer may be
taken to have satisfied the requirements of section 22 in relation
to a renewal, extension or reinstatement if the insurer has
previously given the information required by that section to the
insured and certain other conditions are met. After the
commencement of new section 22, the references in
paragraphs 11(10)(a) and (b) to the information required under
section 22 are to the information required under the new
section 22. This means that, in most cases, the insurer will be
required to comply with new section 22 in the case of a renewal,
extension or reinstatement of a contract that was originally
entered into before the commencement of new section 22, and also
with respect to a variation of the kind referred to in amended
paragraph 11(10)(b) (that is, new subparagraph 11(10)(b)(ii)).
Application
96. Item 9 in Part 3 of Schedule 4 provides that the amendments in Part
3 apply to a contract of insurance whether entered into after
commencement of item 9, and to a contract of insurance that was
originally entered into before commencement of item 9 that is
renewed, extended, varied or reinstated after that commencement.
97. By operation of clause 2, item 9 in Part 3 of Schedule 4 commences
on the day after the end of the period of 18 months beginning on
the day the Act receives the Royal Assent.
Part 4 - Non-disclosure by life insured
98. Contracts of life insurance are often entered into by one person to
cover the life of another. A life insured under a contract of
insurance may include persons who are not the insured and,
therefore, not subject to duty of disclosure obligations under
current law. Although not a contracting party, the person whose
life is proposed to be insured (known as the 'life insured') will
usually provide the insurer with information about matters such as
their state of health, in order to assist the insurer to make a
decision about whether, and on what terms, to issue the policy.
99. Section 25 of the IC Act provides that if, during the negotiations
on a life insurance contract, a prospective life insured makes a
misrepresentation, the IC Act takes effect as if the
misrepresentation has been made by the contracting insured.
However, the existing wording of section 25 only extends to
misrepresentations
100. Non-disclosure can be similar in result to misrepresentation, in
terms of the potential detrimental impact on an insurer's decision
to enter into the contract. Accordingly, item 10 in Part 4 of
Schedule 4 inserts a new section 31A in the IC Act, which is
similar in its effect to section 25, except that it covers non-
disclosures by lives rather than misrepresentations made by them.
The life insured's duty of disclosure under new section 31A is
similar to that applying to insureds under section 21, except any
non-disclosure by a life insured is imputed to the insured. Like
existing the duty of disclosure under section 21 for insureds,
there is an exception applied for non-disclosure of matters that
diminish the risk, are common knowledge, that the insurer knows or
ought to know in the ordinary course of its business, or for which
compliance with the duty is waived by the insurer.
Application
101. By operation of item 11 in Part 4 of Schedule 4, the amendment made
by Part 4 of Schedule 4 applies as follows:
a) to a contract of life insurance that was originally entered
into after the commencement of item 11; and
e) if a contract of life insurance that was originally entered
into before the commencement of item 11 is varied after that
commencement to increase a sum insured under the contract, or
to increase the number of life insureds under the contract, or
to provide one or more additional kinds of cover; then the
contract is treated, to the extent of the variation, as if it
had been originally entered into after the commencement of
item 11, and the amendment applies to the contract to the
extent of the variation.
102. By operation of clause 2, item 11 in Part 4 of Schedule 4 commences
on the day after the end of the period of 18 months beginning on
the day the Act receives the Royal Assent.
Schedule 5 - Remedies of insurers: life insurance contracts
103. Schedule 5 amends the way in which the IC Act deals with remedies
for life insurers in cases of misrepresentation or non-disclosure
by insureds prior to entry into the contract of life insurance.
The amendments, which are designed to make the remedies more
flexible and tailored than those that are currently available,
apply to:
. contracts of life insurance that provide two or more kinds
of insurance cover, or a single kind of cover that is
provided on different terms (for example, an element that
is underwritten and another element that is not) or cover
for two or more life insureds;
. allow the remedies to be applied to each different element
of a bundled life insurance contract as if each element or
aspect were a separate policy;
. introduce a distinction between the remedies applying to
different forms of life insurance cover, so that the
remedies applicable under section 29 would only apply to
'traditional' life insurance policies (that is, life
insurance contracts with a surrender value or that provide
cover in respect of death) and remedies similar to the
remedies applying to general insurance contracts would
apply to all other forms of life insurance, that is,
contracts other than contracts with a surrender value or
providing death cover; and
. expand the range of remedies that are available to a life
insurer in cases where the misrepresentation involves a
misstatement of the date of birth of a life insured under
the contract.
Part 1 - 'Unbundling' of contracts
104. Contracts of life insurance often 'bundle' different types of
protection against more than one type of insurable event resulting
from death, sickness or accident in the one contract. An
application seeking cover for each type of insurable event will be
'unbundled' for separate consideration by an insurer in relation to
each type of risk, and different factors will be taken into account
as part of the underwriting process.
105. For example, an applicant may present with a family medical history
of a condition that is well recognised as a risk factor in the
development of a debilitating disease, but a disease that is
unlikely to result in premature death. In those circumstances, the
insurer is likely to accept a death cover component without a
loading or exclusion, but the income protection cover would be
offered with a modification to the policy terms or with a premium
loading, in response to the additional risk caused by the family
history of the condition.
106. Any misrepresentation or non-disclosure that affects one aspect of
the insurance cover may not be relevant to the other. However, as
currently drafted, the remedies that are available, such as for
avoidance or variation of the contract, must be applied to the
contract as a whole. This can be to the significant disadvantage
of an insured and unnecessarily restrict the remedial options for
an insurer.
107. Item 1 in Part 1 of Schedule 5 inserts a new section 27A into the
IC Act, which provides that if a contract of life insurance
contains two or more kinds of insurance cover or two or more life
insureds, the remedies in Division 3 of Part IV for
misrepresentation and non-disclosure apply to each type of cover or
each life insured, as if the contract contained only the one kind
of cover or provided cover in relation to only one life insured.
Therefore, if a contract contains cover in respect of death and
cover in respect of total and permanent disability, the remedies
for misrepresentation or non-disclosure would apply to each type of
cover and each life insured, separately, as required.
108. Similarly, new subsection 27A(3) provides that where a life
insurance contract contains an element of cover that is
underwritten on particular terms and another element that is either
not underwritten or is underwritten on different terms, the
elements are to be regarded as separate kinds of cover for the
purposes of unbundling in section 27A. The intention of that
provision is to permit unbundling under section 27A in
circumstances such as where a person has cover under a group life
scheme that is automatically provided to all members of the scheme
and which is either not underwritten at all, or underwritten by,
for example, a short-form questionnaire, in addition to additional
'top up' cover that is underwritten through, for example, a
comprehensive questionnaire and full medical examination. This
allows any remedies in respect of non-disclosure and
misrepresentation in relation to obtaining the top-up cover to be
utilised by a life insurer in relation to the top-up only, without
affecting the person's automatic cover.
Application
109. By operation of item 2 in Part 1 of Schedule 5, the amendments made
by Part 1 of Schedule 5 apply to a contract of life insurance
whether originally entered into before or after commencement of
item 2.
110. By operation of clause 2, item 2 in Part 1 of Schedule 5 commences
on the day the Act receives the Royal Assent.
Part 2 - Remedies for non-disclosure and misrepresentation
111. The current section 29 of the IC Act lists remedies that may be
applied by life insurance providers in cases of misrepresentation
and non-disclosure. Whilst suitable for 'traditional' kinds of
life insurance policy (that is, those with a surrender value or
providing death cover), the current provision is not well-suited to
many types of life insurance that are now made available (for
example, short-term cover for income protection or total and
permanent disability). In many cases, misrepresentation or non-
disclosure in respect of non-traditional types of life insurance
policy would be better dealt with through remedies akin to those
available for general insurance policies.
112. Surrender value refers to the cash amount payable by the life
insurance company to the policy owner in the event a policy is
voluntarily terminated before its maturity or the death of the
insured person. They are common in traditional 'whole of life' and
'endowment' investment-style insurance policies. The Life
Insurance Act 1995 sets the minimum standard for the calculation of
a surrender value.
113. Item 5 in Part 2 of Schedule 5 inserts a new subsection 29(1A),
which will define contracts of life insurance, for the purposes of
applying the remedies in section 29, as contracts of life insurance
that either have a surrender value or provides insurance cover in
respect of the death of a life insured.
114. Item 4 in Part 2 of Schedule 5 inserts new section 28(1A) into
section 28 of the IC Act to provide the same remedies for life
insurance contracts, which do not have a surrender value or provide
death cover, as are available with respect to general insurance
policies under section 28 . Notes to items 4 and 5 indicate that
new headings are inserted for section 28 and in relation to
subsection 28(1), new subsection 28(1A) and revised section 29.
115. Item 8 in Part 2 of Schedule 5 amends the reference to 'a contract'
in subsection 29(3) of the IC Act to 'the contract'. This change
is in response to a concern that, on one interpretation of the
current subsection 29(3), the insurer can only avoid a contract for
non-disclosure or misrepresentation if they show that they would
not have been prepared to enter any contract of life insurance with
the insured, had the insurer known the true facts. The intention
of this change is to clarify that the insurer should be able to
avoid the particular contract if they would not have extended cover
of the risk proposed on any terms, had the true facts been known.
The fact that the insurer may still have been willing to offer
cover of a different type of risk had the true facts been known
should not mean their right to avoid the particular contract for
misrepresentation or non-disclosure under subsection 29(3) is lost.
This issue is avoided by referring to 'the contract' rather than
'a contract'.
116. Items 6 and 7 make some minor technical drafting changes to the
wording of section 29.
Application
117. By operation of item 9 in Part 2 of Schedule 5, the amendments made
by Part 2 apply as follows:
a) to a contract of life insurance that was originally entered
into after the commencement of item 9; and
b) if a contract of life insurance that was originally entered
into before the commencement of item 9 is varied after that
commencement to increase a sum insured under the contract, or
to increase the number of life insureds under the contract, or
to provide one or more additional kinds of cover, then the
contract is treated, to the extent of the variation, as if it
had been originally entered into after the commencement of
item 9, and the amendments apply to the contract to the extent
of the variation.
118. By operation of clause 2, item 9 in Part 2 of Schedule 5 commences
on the day after the end of the period of 12 months beginning on
the day the Act receives the Royal Assent.
Part 3 - Remedy for misstatement of date of birth
119. Section 30 of the IC Act contains specific remedies for life
insurers in circumstances where the date of birth of one or more
life insureds was incorrectly stated at the time the contract was
entered into. It covers situations where age was understated or
overstated, and allows the insurer, when the true date of birth is
known, to adjust the sum insured or reduce the premium payable.
Item 10 in Part 3 of Schedule 5 inserts a new subsection 30(3A) in
the IC Act to establish an additional remedy for an insurer in
circumstances addressed by section 30. Under this new option, an
insurer may vary the contract by changing its expiration date to a
date calculated on the basis of the correct date of birth. This
means that neither the amount insured nor the premium payable needs
to be modified.
120. Item 11 in Part 3 of Schedule 5 amends subsection 30(4), so that a
variation of the contract as permitted under the new subsection
30(3A) is taken to have occurred from the time the contract was
entered into. This is in accordance with the rule regarding the
existing remedies in subsection 30(2).
Application
121. By operation of item 12 in Part 3 of Schedule 5, the amendments
made by Part 3 apply as follows:
a) to a contract of life insurance that was originally entered
into after the commencement of item 12; and
b) if a contract of life insurance that was originally entered
into before the commencement of item 12 is varied after that
commencement to increase a sum insured under the contract, or
to increase the number of life insureds under the contract, or
to provide one or more additional kinds of cover, then the
contract is treated, to the extent of the variation, as if it
had been originally entered into after the commencement of
item 12, and the amendments apply to the contract to the
extent of the variation.
122. By operation of clause 2, item 12 in Part 3 of Schedule 5 commences
on the day the Act receives the Royal Assent.
Part 4 - Cancellation of contracts
123. Section 60 of the IC Act provides the circumstances in which an
insurer may cancel a contract of general insurance. There is no
section 60 equivalent for contracts of life insurance, and no
provision in the IC Act that allows a life insurer to cancel a
policy of life insurance for any reason. Cancellation of life
insurance contracts for non-payment of premiums ('forfeiture') is
regulated by the Life Insurance Act 1995. Rights of cancellation
for other reasons (for example, a fraudulent claim) are currently
left to the common law.
124. In response to court decisions regarding rights of cancellation
regarding life insurance contracts under the common law, the Bill
will introduce a statutory framework for life insurance
cancellation similar to that applying to general insurance. Item
13 in Part 4 of Schedule 5 inserts after section 59 in Part VII of
the IC Act (Expiration, renewal and cancellation) a new section
(section 59A - Cancellation of certain contracts of life insurance)
providing for a life insurer to cancel a life insurance contract
for the same reasons that an insurer may cancel a contract of
general insurance, except in relation to non-payment of a premium.
A note to new paragraph 59A(d) indicates that section 210 of the
Life Insurance Act 1995 deals with forfeiture of a contract of life
insurance because of non-payment of a premium.
125. Current section 63 prohibits an insurer from cancelling a contract
of general insurance and any purported cancellation in
contravention of section 63 is void. Item 14 in Part 4 of Schedule
5 amends section 63 to provide for a mirror contravention in
relation to a purported cancellation (contrary to section 63) of a
contract of life insurance. Accordingly, a cancellation of a life
insurance contract (other than under the Life Insurance Act 1995)
will have to be effected in accordance with the requirements of
section 59A. This change does not affect the notice requirements
under existing section 59.
Application
126. By operation of item 15 in Part 4 of Schedule 5, the amendments
made by Part 4 of Schedule 5 apply to a contract of life insurance
that was originally entered into after the commencement of item 15.
127. The amendment to section 63 made by item 14 does not alter the law
applying to general insurance, so that amendment applies to general
insurance contracts entered into before or after the commencement
of item 15.
128. By operation of clause 2, item 15 in Part 4 of Schedule 5 commences
on the day the Act receives the Royal Assent.
Schedule 6 - Third parties
129. Third parties may be persons that are specified in a contract of
insurance (whether by name or otherwise) as being persons to whom
cover provided by the contract extends ('third party
beneficiaries') or they may be third parties against whose claims
an insured or third party beneficiary has insurance cover.
Schedule 6 contains a series of amendments designed to alter the
rights and obligations of third parties under the IC Act.
Part 1 - Requests by third party beneficiaries to insurers for information
130. Under current section 41 of the IC Act, an insured that has made a
claim under a contract of liability insurance may require the
insurer to inform them in writing:
. whether the insurer admits that the contract applies to
the claim; and
. if the insurer so admits, whether the insurer proposes to
conduct, on behalf of the insured, the negotiations and
any legal proceedings in respect of the claim made against
the insured.
131. Item 1 in Part 1 of Schedule 6 substitutes a new section 41 in
substantially the same terms as the current section 41, except that
it is extended to give third party beneficiaries (as claimants) the
same rights as insureds under the section.
Application
132. By operation of item 2 in Part 1 of Schedule 6, the amendment made
by Part 1 of Schedule 6 applies to a contract of liability
insurance that was originally entered into after commencement of
item 2. The amendment also applies to a contract of liability
insurance that was originally entered into before the commencement
of item 2 and is renewed after that commencement.
133. By operation of clause 2, item 2 in Part 1 of Schedule 6 commences
after the end of the period of 12 months beginning on the day the
Act receives the Royal Assent.
Part 2 - Insurer's defences in actions by third party beneficiaries
134. Section 48 of the IC Act deals with, amongst other things, the
defences available to a general insurer against a claim by a third
party beneficiary. Section 48AA makes similar provision regarding
contracts of life insurance offered in connection with Retirement
Savings Accounts (RSAs).
135. Items 3 and 4 in Part 2 of Schedule 6 amend (including by repealing
and substituting) subsections 48(1) and 48(2) so that they use the
term 'third party beneficiary', now defined in section 11 (see item
1 in Part 1 of Schedule 1), but the substance of the subsections is
unchanged. There are similar amendments to section 48AA in items 7
and 8 in Part 2 of Schedule 6.
136. Section 48AA is worded similarly to section 48, except that it
deals with the defences a life insurer has against a claim by third
party beneficiaries in relation to a contract of life insurance
taken out by an RSA provider. To ensure greater consistency in the
wording of sections 48AA and 48, items 5 and 9 amend paragraphs
48(2)(a) and 48AA(2)(a), so that the wording of the two sections
mirror each other.
137. There has been some doubt as to whether subsection 48(3), and as a
consequence subsection 48AA(3), allow for claims by third party
beneficiaries to be tainted by the wrongful conduct of an insured.
There is also doubt as to whether an insurer may raise pre-
contractual conduct, such as a breach of the duty of disclosure, in
assessing a claim by a third party beneficiary.
138. The intent of sections 48 and 48AA (as amended) is that third party
beneficiaries should be in no better position, in terms of their
ability to claim, than the insured. An insurer should be entitled
to raise defences relating to the conduct of an insured, including
conduct occurring prior to the time the contract was entered into.
139. To give effect to these intentions, items 6 and 11 in Part 2 of
Schedule 6 amend subsections 48(3) and 48AA(3) respectively, to
make it clear 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 that may be raised may have occurred either
after the contract was entered into or before (for
example, non-disclosure).
Application
140. By operation of subitem 12(1), the amendments made by items 3 to 6
in Part 2 of Schedule 6 apply to a contract of general insurance
originally entered into after the commencement of subitem 12(1).
141. The amendments also apply to a contract of general insurance that
was originally entered into before the commencement of subitem
12(1) and is renewed after that commencement.
142. By operation of subitem 12(2), the amendments made by items 7 to 11
in Part 2 of Schedule 6 apply to a contract of life insurance that
was originally entered into after the commencement of subitem
12(2). If a contract of life insurance that was originally entered
into before the commencement of subitem 12(2) is varied after that
commencement to increase a sum insured under the contract, or to
increase the number of life insureds under the contract, or to
provide one or more additional kinds of cover, then the contract is
treated, to the extent of the variation, as if it had been
originally entered into after the commencement of subitem 12(2),
and the amendments made by items 7 to 11 apply to the contract to
the extent of the variation.
143. By operation of clause 2, item 12 in Part 2 of Schedule 6 commences
at the end of the period of 12 months beginning on the day the Act
receives the Royal Assent.
Part 3 - Rights and obligations of third party beneficiaries under life
insurance contracts
144. Section 48A of the IC Act applies to contracts of life insurance
that are effected on the life of one person but expressed to be for
the benefit of another person (a third party beneficiary). As part
of its review, the Review Panel recommended a series of amendments
be made to section 48A in response to recent developments in the
insurance industry.
145. Item 13 in Part 3 of Schedule 6 amends section 48A by repealing
current subsections 48A(1) and (2) and substituting new subsections
48A(1) and (2) to:
. allow for circumstances in which a person whose life is
insured under a contract of life insurance may be a third
party beneficiary;
. ensure that a third party beneficiary who has a claim over
money payable under the contract of life insurance may
bring an action against the insurer in respect of the
claim without the intervention of the policyholder; and
. ensure that the third party beneficiary is capable of
giving a valid discharge to the insurer in relation to the
insurer's obligations in respect of the claim.
Application
146. By operation of item 14 in Part 3 of Schedule 6, the amendment in
Part 3 of Schedule 6 applies to a contract of life insurance that
was originally entered into after the commencement of item 14.
147. If a contract of life insurance that was originally entered into
before the commencement of item 14 is varied after that
commencement to increase a sum insured under the contract, or to
increase the number of life insureds under the contract, or to
provide one or more additional kinds of cover, then the contract is
treated, to the extent of the variation, as if it had been
originally entered into after the commencement of item 14, and the
amendment made by item 13 in Part 3 of Schedule 6 applies to the
contract to the extent of the variation.
148. By operation of clause 2, item 14 in Part 3 of Schedule 6 commences
at the end of the period of 12 months beginning on the day the Act
receives the Royal Assent.
Part 4 - Rights of third party to recover against insurers
149. Section 51 of the IC Act deals with the rights of third parties to
recover directly against an insurer in circumstances where the
insured under a contract of liability insurance is liable in
damages to the third party. The section provides that, where an
insured has died or cannot be found, the third party may bring an
action against the insurer directly.
150. Items 15, 16 and 17 in Part 4 of Schedule 6 expand section 51 so
that it not only covers liability of an insured but also liability
of a third party beneficiary.
Application
151. By operation of item 18, the amendments in Part 4 of Schedule 6
apply to a contract of liability insurance originally entered into
after the commencement of item 18. The amendments also apply to a
contract of liability insurance that was originally entered into
before the commencement of item 18 and is renewed after that
commencement.
152. By operation of clause 2, item 18 in Part 4 of Schedule 6 commences
on the day after the end of the period of 12 months beginning on
the day the Act receives the Royal Assent.
Part 5 - Representative actions by ASIC on behalf of third party
beneficiaries
153. Section 55A of the IC Act permits ASIC, if it considers it in to be
the public interest, to bring or continue actions against insurers
on behalf of one or more insureds in relation to certain breaches
by the insurer of the IC Act.
154. Items 19 to 24 of Part 5 of Schedule 6 make several amendments to
section 55A to extend ASIC's powers to cover bringing or continuing
actions against insurers on behalf of third party beneficiaries as
well as insureds.
Application
155. By operation of item 25, the amendments in Part 5 of Schedule 6
apply to contracts of insurance whether originally entered into
before or after the commencement of item 25.
156. By operation of clause 2, item 25 in Part 5 of Schedule 6 commences
on the day the Act receives the Royal Assent.
Part 6 - Non-disclosure or misrepresentation by members of group life
insurance schemes
157. Insurers normally have a remedy for non-disclosures and
misrepresentations made by insureds only prior to the time the
contract was entered into. However, in the case of group contracts
of life insurance that are taken out by, for example,
superannuation trustees for the benefit of all the scheme members,
the contract date will often pre-date the joining of the scheme by
fund members. As a consequence, an insurer would ordinarily have
no remedy for non-disclosure and misrepresentation in relation to
members who join a group scheme and receive cover under the
relevant contract of life insurance after the contract date.
158. To deal with this situation, current section 32 of the IC Act
provides that non-disclosures or misrepresentations made in respect
of scheme members of superannuation and retirement schemes are
treated as though the contract were an individual contract of life
insurance that was entered into at the time when the proposed
member joined the scheme.
159. In some circumstances, individuals will join a superannuation
scheme but there will be some delay before life insurance cover
they acquire as part of joining that scheme is commenced. For
example, a new employee may join a superannuation scheme and
superannuation contributions may be made on their behalf, but
before the insurer provides life insurance cover, that employee
must undergo a medical examination and/or answer questions about
their health.
160. In those circumstances, the existing section 32 would still deny
the insurer a remedy if non-disclosure or misrepresentation
occurred during the interim period, because under current paragraph
32(b), the contract is taken to be entered into when the member
joined the scheme.
161. Replacement section 32 in item 34 in Part 6 of Schedule 6 addresses
this difficulty by providing that, where there is a delay from the
time of joining the scheme until the time that cover is actually
effected, the relevant contract of life insurance is taken to have
commenced (that is, to be 'entered into') at the time the proposed
life insured became a life insured under the scheme, in other
words, at the time the life insurance cover under the scheme took
effect in relation to the member concerned.
162. There are, in addition to 'blanket' contracts of life insurance
taken out in connection with a superannuation scheme, other
circumstances in which life insurance is taken out for a group of
people, many of whom may become eligible for cover after the
contract date. For example, contracts of life insurance for groups
of people linked by a common factor such as employees of a company,
or a scheme unrelated to employment such as membership of a health
insurance scheme that offers members optional life insurance cover.
Those other contracts also present a difficulty with the
availability of insurer remedies for non-disclosure and
misrepresentation.
163. A broader term is to be introduced for the purposes of the new
section 32, namely, a 'group life contract', which is defined to
mean a contract of life insurance that is maintained for the
purpose of a superannuation or retirement scheme, or another scheme
(including one not related to employment). This definition is
inserted into subsection 11(1) by item 27.
164. The term 'blanket superannuation contract' in subsection 4(2) of
the IC Act is replaced by item 2 with the expression
'superannuation contract (other than an individual superannuation
contract)', and items 29 to 31 make some consequential changes to
subsection 11(4).
165. Items 28, 32 and 33 change the phase 'superannuation or retirement
scheme' to 'superannuation, retirement or other group life scheme'
in paragraph (b) of the definition of 'proposal form' in
subsection 11(1) and in paragraphs 23(a) and 26(3)(a). This change
enlarges the scope of operation of those provisions to encompass
other types of group life schemes.
166. Item 35 corrects a typographical error in section 32A.
Application
167. By item 36 in Part 6 of Schedule 6, the amendments relating to
replacement of the term 'blanket superannuation contract' by items
26, 29, 30 and 31 apply to a contract of life insurance whether
originally entered into prior to, or subsequent to, the
commencement of item 36. The amendment to correct an error in 32A
also applies to contracts entered into before or after commencement
of item 36.
168. The remainder of the amendments in Part 6 apply to a contract of
life insurance entered into after commencement of item 36 in Part 6
of Schedule 6.
169. Where a contract of life insurance that was originally entered into
before the commencement of item 36 in Part 6 of Schedule 6 is
varied after that commencement to increase a sum insured under the
contract, or to increase the number of life insureds under the
contract, or to provide one or more additional kinds of cover, then
the contract is treated, to the extent of the variation, as if it
had been originally entered into after the commencement of item 36,
and the amendments made by items 27, 28 and 32 to 34 apply to the
contract to the extent of the variation.
170. By operation of clause 2, Part 6 of Schedule 6 commences on the day
after the end of the period of 12 months beginning on the day the
Act receives the Royal Assent.
Schedule 7 - Subrogation
171. In the case of indemnity insurance, unless excluded by the terms of
the contract, there is a right for an insurer to bring an action in
the name of the insured (that is, the insurer is subrogated to the
rights and remedies of the insured in respect of the subject matter
insured) to pursue any claims the insured may have against third
parties which have contributed to a loss. So if, for example, an
insurer pays a claim to an insured arising from a motor vehicle
collision, the insurer may, in the name of the insured, pursue
actions against the person who caused the collision.
172. The amount recovered from the third party is often not equal to the
amount the insurer has paid to the insured in respect of the loss.
The costs of the action, and any difference between the amount of
the loss and the amount insured, must also be considered when
deciding to whom any recovered moneys should be paid.
173. Section 67 of the IC Act provides rules for how moneys recovered
from a third party by an insurer under a right of subrogation
should be divided between the insurer and the insured. The Review
Panel listed a number of criticisms of section 67 in its review.
174. To address some of the difficulties experienced with the existing
section 67, item 2 of Schedule 7 introduces a replacement section
67 containing rules that are intended to provide for the division
of any proceeds from a recovery action. This provision is based on
the following principles.
. First, the party taking the recovery action should be
entitled to reimbursement for the administrative and legal
costs of that action from any moneys recovered. If both
parties contribute, they both should be reimbursed (see
new subsection 67(4)), or share the reimbursement pro rata
if there is insufficient recovered money to reimburse both
in full (see new subsection 67(5)).
. Secondly, there are three possibilities for distribution
of remaining sums depending on who has funded the recovery
action.
a) If the insurer funds the recovery action pursuant to its
rights of subrogation, it is entitled to an amount equal
to the amount that it has paid to the insured under the
contract of insurance. The insured is then entitled to
any further amount necessary for it to ultimately
recover from the insurer under the contract of insurance
or the third party in the recovery action, or both in
combination, the full amount of its loss (not just the
measure of indemnity under the policy). This
entitlement does not diminish the insured's right to
receive payment under the policy in a prompt manner in
accordance with the terms of the contract and the
insurer's obligation to pay promptly, subject to any
contrary agreement between the parties (see new
subsection 67(2)).
b) If the insured funds the recovery action, the order in
the preceding paragraph is reversed. The insured is
entitled to retain an amount so that the total that it
receives from the recovery action and under the policy
is equal to its total loss. The insurer is entitled at
this point to an amount equal to the amount that it has
paid to the insured under the insurance contract (see
new subsection 67(3)).
c) If the action is funded jointly by both the insurer and
insured, they are both entitled to the same amounts as
referred to in (a) and (b) above pro rata if there are
insufficient funds to reimburse them in full (see new
subsection 67(5)).
. Thirdly, any excess or windfall recovery is then to be
distributed to both parties in the same proportions as
they contributed to the administrative and legal costs of
the recovery action (see new subsection 67(7)). Through
this process, the party (or parties) that bore most of the
cost and risk of the recovery action should receive the
benefit of the windfall. Most commonly this would be the
insurer - but the insurer only gets the benefit after the
insured has received full recovery for all its losses,
because the insured would have been entitled to these
losses as damages from the third party, whether or not
there was any insurance in place.
. Finally, any separate or identifiable component in respect
of interest should be divided fairly between the parties,
having regard to the amounts that each has recovered and
the periods of time for which each party lost the use of
their funds.
175. The Review Panel had also recommended, for the purposes of the new
section 67, that third party beneficiaries should be treated as
insureds and this is the effect of item 1 of Schedule 7.
Accordingly, the same principles of subrogation apply whether the
person being indemnified is the insured party or a third party
beneficiary to whom the indemnity cover extends.
176. New subsection 67(9) provides that the rights of the insurer and
insured (or third party beneficiary) under section 67 may be
modified by the terms of the relevant insurance contract.
Application
177. By operation of item 3 of Schedule 7 and clause 2, the amendments
made by Schedule 7 apply to a contract of general insurance that
was originally entered into after the commencement of item 3.
Schedule 7 also applies to a contract of general insurance that was
originally entered into before the commencement of item 3 of
Schedule 7, and is renewed after that commencement.
178. By operation of clause 2, item 3 of Schedule 7 commences on the day
after the end of the period of 6 months beginning on the day the
Act receives the Royal Assent.
179. Chapter 2
Regulation impact statement
Background
Definition - Insurance
180. Insurance plays a vital role in Australia's economy. Individuals,
groups, businesses and governments are able to participate in
social and economic activities that they otherwise would not be
able to engage in by using insurance as a means to price and
transfer risks associated with those activities.
181. Insurance is created by an insurer and an insured entering into a
contract. Under the contract of insurance, a person facing a risk
of loss (the insured) from a possible occurrence pays a
contribution known as a premium to an insurer who, in return,
promises to compensate the insured in proportion to their loss
should the occurrence eventuate.
182. There are four main classes of insurance:
. personal - provides benefits if the insured person dies or
is disabled by accident or sickness;
. property - provides against loss of or damage to insured
property such as buildings or their contents, motor
vehicles, ships, cargoes or any other class of property;
. liability - provides against legal liability to pay
compensation for injury or damage for which the relevant
insured may be sued by some other person; and
. monetary loss - provides against monetary losses due to,
for example, embezzlement by employees or failure of a
debtor to repay a loan.
183. Personal insurance equates to life insurance. The remaining three
classes of insurance are categorised as general insurance.
Profile of the Australian insurance market
General insurance
184. In the financial years ending in 2008-09, there were 133 private
sector insurers accepting general insurance business (i.e.
insurance other than life and health insurance). Of these, 116
were direct insurers and 17 were reinsurers. Private insurers
reported gross premium revenue of $31.0 billion. Direct insurers
reported gross premium revenue of $29.2 billion, making up 94.2 per
cent of the total. Reinsurers accounted for the remaining 5.8 per
cent of the total, or $1.8 billion. At 22.8 per cent, the domestic
motor vehicle class of business accounted for the largest
percentage of total direct gross premium revenue.
185. In the financial years ending in 200809, private insurers reported
total assets of $94.2 billion, an increase of $3.1 billion (3.4 per
cent) on the previous year. Of these assets, $84.8 billion (90 per
cent) are held by direct insurers. Industry total liabilities were
$65.6 billion, of which $59.2 billion (89.9 per cent) are held by
direct insurers.[1]
Life insurance
186. As at September 2009, there were 32 life insurance companies
operating in Australia. They managed $239.3 billion in assets and
generated $41 billion in net premiums for the twelve months ended
September 2009.[2]
187. The life insurance market is split into 'superannuation' and
'ordinary', defined by the source of business. In recent years,
the superannuation business has become the main focus of life
insurers, representing 91.1 per cent of premiums relating to
Australian policyholders for the year to 31 March 2008.[3]
188. Traditional life insurance products (such as endowment policies,
whole of life policies and level premium insurance policies) have
largely been replaced by more modern products, such as term
insurance, as these products reduce the longevity risk of insurers
and provide flexibility for consumers.
Insurance Contracts Act 1984
189. The law governing contracts of insurance has a direct influence on
the effectiveness and efficiency of the insurance market in
Australia. For some time, the law concerning contracts of
insurance was derived from a combination of common law principles
and statutes issued by a variety of parliaments.
190. In 1982, the Australian Law Reform Commission (ALRC) released
Report No 20, Insurance Contracts (ALRC 20), which made a number of
detailed recommendations for reform of the law concerning contracts
of insurance. That report led to the enactment by the Australian
Parliament of the Insurance Contracts Act 1984 (IC Act), which came
into operation on 1 July 1986. The IC Act provisions were based
largely on the ALRC's recommendations.
Problem identification
191. The ALRC identified a series of key principles in ALRC 20 that it
considered should be the foundation of the law concerning contracts
of insurance. Those principles, outlined below, addressed some
issues and deficiencies that had affected the efficiency of the
former law.
. Uniformity and modernisation - The law should, as far as
possible, be uniform throughout Australia. The ALRC noted
the law should remove uncertainties and specify acceptable
rules for the modern relationship of the insurer and
insured.
. Assurance of fair competition - The law should ensure that
freedom of contract and promotion of competition, so far
as compatible with principles of equity and fairness to
the insuring public, are basic goals.
. Promotion of informed choice of insurance - As far as
practicable, insureds should receive sufficient
information and be otherwise protected by the law so that
they may choose the insurance policy best suited to their
needs. The ALRC noted that a lack of information
concerning contracts of insurance and the different types
of cover available was a serious problem for consumers.
. Principle of utmost good faith - The principle of utmost
good faith, which has traditionally underlined contracts
of insurance, should remain the touchstone of contracts of
insurance.
. Need to avoid unfair burdens - The remedies available to
insurers in respect of misrepresentation, non-disclosure
and breach of contract should not place a burden on the
insured that is vastly disproportionate to the loss the
insured's actions caused to the insurer.
. Need to avoid catastrophic losses - As far as practicable,
insureds that might otherwise unintentionally be exposed
to the risk of catastrophic losses should be protected
against losing insurance cover through no fault of their
own.[4]
192. The IC Act was designed to give effect to those principles. Since
its commencement in 1986, the market for insurance in Australia has
evolved, both in terms of the type of insurance on offer and the
participants in the market. Judicial interpretations of the IC Act
have highlighted how it applies in a range of situations, some of
which may not have been contemplated when the IC Act was designed.
Also, subsequent statutes, such as the Corporations Act 2001 and
Electronic Transactions Act 1999, have brought change to the
surrounding regulatory environment.
193. Those developments, and the experience of applying the IC Act since
1986, has led to a widely held view that, although the IC Act has
generally operated effectively to the benefit of the insurance
market, there are aspects that would benefit from refinement to
prevent inefficiencies and inappropriate outcomes.
Revision of the IC Act: Objectives
194. In 2003, the Australian Government commissioned a review panel (the
Review Panel) to review the IC Act to ensure it 'continues to meet
its original consumer protection objectives and does not discourage
insurers from writing policies in Australia.[5] The Review Panel
was asked to report on whether provisions of the IC Act remained
appropriate in the light of developments in the insurance market
and whether any amendments were necessary to clarify or remove
ambiguity.
195. The Review Panel found that the IC Act was generally operating
satisfactorily. However, some amendments were recommended to
address insurance market developments and judicial interpretation
during the period since its enactment. The Review Panel's
recommendations were developed having regard to the need to
preserve an appropriate balance between the rights and obligations
of insurers and insureds.
Consultation
Review Panel deliberations
Section 54 of the IC Act
196. Insurers had particular concerns about the operation of section 54
of the IC Act and its impact on the cost and availability of
liability insurance. The Review Panel began its review by
releasing an issues paper that explained the operation of section
54 and its current judicial interpretation. In response, 32
written submissions were received from stakeholders, including the
insurance industry, consumer representatives, the regulator, and
dispute resolution bodies. The Review Panel also met with
stakeholders.
197. The Review Panel recommended legislative reform of section 54, but
only in respect of particular types of insurance policies. Draft
amendments that gave effect to the Review Panel's initial
recommendations were released for public consultation in 2004. An
additional 16 submissions primarily from the insurance industry,
the legal profession and the regulator were received on the draft
amendments. The Review Panel made further recommendations to
revise the draft amendments in response to these submissions and
stakeholder consultations.
Provisions of the IC Act other than section 54
198. The Review Panel's review of provisions of the IC Act other than
section 54 began in November 2003 with a request to stakeholders
for written 'submissions at large' on issues that may be affecting
the current operation of the IC Act and options to address those
issues. This was followed by a series of stakeholder meetings in
February 2004 to identify key matters for consideration from those
issues raised in written submissions.
199. In March 2004, the Review Panel released an issues paper, which
outlined the matters raised by stakeholders that the Review Panel
intended exploring in the second phase of the Review. The Review
Panel noted that it could only address issues that had an adverse
impact on the operation of the IC Act and could not analyse some
issues that may be of significance but fell outside the review's
terms of reference.
200. The Review Panel received around 25 submissions from the insurance
industry, consumer representatives, dispute resolution bodies and
the legal profession in response to the issues paper and used them
to develop a proposals paper, which was released in May 2004. The
proposals paper included over 40 proposals to amend the IC Act.
The Review Panel sought further comments on the contents of its
proposals, particularly those that had not been raised in the
issues paper but were developed subsequently.
201. The proposals paper generated further written submissions from the
insurance industry, dispute resolution bodies, consumer
representatives and the legal profession. Those were taken into
account by the Review Panel in formulating its final
recommendations and report, released in January 2005.
Summary of key stakeholder views on the Review Panel's reports
202. Insurance brokers, legal specialists, life insurance industry
representatives and the regulator expressed general support for the
recommendations of the Review Panel, with some reservations on
details.
203. Consumer representatives indicated that they would have preferred
the Review Panel to propose more regulation concerning claims
handling processes, and they also have some reservations about the
detail of some recommendations. However, generally consumer
representatives were satisfied with the review process and
considered that the recommendations to be well-reasoned and
balanced.
204. The industry body representing general insurers expressed some
dissatisfaction with the time frame of the consultation process and
opposed a number of the Review Panel's recommendations on the basis
that they would impose additional costs for their insurers.
Exposure draft legislative package - February 2007
205. An exposure draft of an amending Bill and accompanying regulations
was prepared so that stakeholders could comment on the detail of
the proposals. The exposure draft legislative package was publicly
released in February 2007. It included a revised version of the
section 54 amendments. More than 20 submissions were received on
the exposure draft Bill.
Identification of options
206. The options for reform, outlined below, are based on a number of
the recommendations of the Review Panel, developed in the course of
the review in meetings with the Review Panel and in response to
issues raised by stakeholders in written submissions to the Review
Panel. These options were subsequently modified in response to
stakeholders' concerns raised in relation to the February 2007
exposure draft Bill.
207. The Insurance Contracts Amendment Bill 2009 (the Bill) is based on
a number of the Review Panel's recommendations and contains some
further modifications made to the February 2007 exposure draft Bill
in the light of consultations with stakeholders subsequent to the
release of the Bill, including, in some cases, removal of a
measure.
208. The proposed regulatory changes in the 2009 Bill, which are not
minor or machinery, relate to the following matters:
1. electronic communication;
2. objective component of insured's duty of disclosure;
3. disclosure obligations on renewal of an eligible contract of
insurance;
4. notification of duty of disclosure;
5. non-disclosure rules and life insureds;
6. life insurance remedies; and
7. third party beneficiaries.
209. The groups that will primarily be impacted upon by the proposals
include:
. insurers;
. insureds (especially those that have claims), including
proposed insureds and beneficiaries under policies; and
. government and regulators, including self-regulatory
organisations.
210. Most of the proposals affecting insurers or insureds would also
affect insurance brokers, where a broker was involved in the
negotiation and ongoing management of an insurance contract.
However, for the sake of simplicity, insurance brokers have not
been identified as a separate impact group for the purposes of the
regulation impact statement. It has been assumed that the costs
and benefits accruing to insurance brokers as a result of the
proposals would ultimately be passed onto insurers and insureds.
211. Options for responses to each of these matters are analysed below.
Identification of options, impact analysis, conclusions and recommendations
Impact assessment methodology
212. Impacts can be divided between three impact groups (consumers,
business and government). Typical impacts of an option on
consumers might be changes in access to a market, the level of
information and disclosure provided, or prices of goods or
services. Typical impacts of an option on business would be the
changes in the costs of compliance with a regulatory requirement.
Typical impacts on government might be the costs of administering a
regulatory requirement. Some impacts, such as changes in overall
confidence in a market, may impact on more than one impact group.
213. The assessment of impacts in this regulation statement is based on
a seven-point scale (-3 to +3). The impacts of each option are
compared with the equivalent impact of the 'do nothing' option. If
an impact on the impact group would, relative to doing nothing, be
beneficial, the impact is allocated a positive rating of +1 to +3,
depending on the magnitude of the relative benefit. On the other
hand, if the impact imposes an additional cost on the impact group
relative to the status quo, the impact is allocated a negative
rating of -1 to -3, depending on the magnitude of the relative
cost. If the impact is the same as that imposed under the current
situation, a zero score would be given, although usually the impact
would not be listed in such a case.
214. The magnitude of the rating of a particular impact associated with
an option has been assigned taking into account the overall
potential impact on the impact group. The reference point is
always the status quo (or 'do nothing' option). Whether the cost
or benefit is one-off or recurring, and whether it would fall on a
small or large proportion of the impact group (in the case of
business and consumers), is factored into the rating. For example,
a cost or benefit, even though large for the persons concerned, may
not result in the maximum rating (+/-3) if it is a one-off event
that only falls on a few individuals. Conversely, a small increase
in costs or benefits might be given a moderate or high rating if it
would be likely to recur or if it falls on a large proportion of
the impact group. The rating scale for individual impacts is
explained in the table below.
Rating an individual impact
|+3 |+2 |+1 |
|Consumers |Access to a cheaper |Risk of tyre failure |
| |solution for vehicle |that can result in |
| |tyres |personal and property|
| | |damage as a result of|
| | |collision. Damage |
| | |can be severe but |
| | |cases are rare |
|Industry | |Some compensation |
| | |payments to persons |
| | |as a result of |
| | |collisions caused by |
| | |the tyre |
|Government |Advantages for waste | |
| |management perspective | |
Option B: Ban on sale of the new tyre
| |Benefits |Costs |
|Consumers |No persons will be |Lack of access by |
| |affected by tyre |consumers to |
| |failure and |long-wearing vehicle |
| |resultant damage |tyres, increasing the|
| |(+3) |cost of vehicle |
| | |maintenance [-2] |
|Industry |No compensation |Transitional costs |
| |payments for |involved with |
| |accident victims |switching back all |
| |[+1] |manufacturing/marketi|
| | |ng operations to |
| | |conventional tyres |
| | |[-3] |
|Government | |Conventional tyres |
| | |produce more waste |
| | |which is costly to |
| | |deal with [-1] |
|Sub-rating |+4 |-6 |
|Overall rating |-2 |
Option C: Industry-developed quality control standards
| |Benefits |Costs |
|Consumers |Much lower risk of | |
| |tyre failure and | |
| |resultant damage than| |
| |status quo [+2] | |
|Industry |Significantly less |Developing and |
| |compensation payments|monitoring |
| |for accident victims |industry-wide |
| |[+1] |quality control |
| | |standards [-2] |
|Government | | |
|Sub-rating |+3 |-2 |
|Overall rating |+1 |
215. In the above hypothetical example, Option C appears to have a
better impact for consumers and a better overall cost/benefit
rating than Option B.
Electronic communication
Problem
216. Communications under the IC Act are currently exempt from the
operation of the Electronic Transactions Act 1989 (ET Act). The ET
Act provides that if a Commonwealth law requires a notice to be
provided in writing, it may also be given by means of electronic
communication if the relevant recipient consents.
217. There are no equivalent facilities in the IC Act. Accordingly, the
exemption for the IC Act limits the ability of insurers to utilise
electronic communication with insureds. Use of electronic
communication for various requirements under the IC Act, including
for the dissemination of notices, documents and other information,
has the potential to lower costs and increase convenience for
insurers and insureds.
Objective
218. The objective is to ensure that the IC Act permits a range of means
of communication between insurers and insureds, including by
electronic means, such as phone, facsimile, and the internet,
provided that the risks for the recipients in the use of electronic
means are not unreasonable.
Options
Option A: Do nothing
219. Under this option, the IC Act would remain exempt from the ET Act
and a number of communications under the Act would still need to be
made by traditional writing.
Option B: Make amendments so that electronic communication may be
used for communications between insurers and insureds
220. This option would involve removing the exemption of the IC Act from
the operation of the ET Act and amending the IC Act, so that
communications currently required to be 'in writing' for the
purposes of the IC Act may be made by electronic means. Under this
option, insurers would not be compelled to utilise electronic
communication methods to interface with insureds or potential
insureds if they did not choose to do so.
Impact analysis
Impact group identification
Affected groups:
. insurers; and
. insureds.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Consumers |No risk of |Additional costs of |
| |inadvertent loss of |hard copy |
| |cover arising from |correspondence passed|
| |electronic |on through additional|
| |communication not |charges |
| |being received or | |
| |appropriately | |
| |recognised | |
|Insurers | |Using hard copy |
| | |correspondence for |
| | |all required |
| | |communications may be|
| | |more expensive than |
| | |electronic means |
|Government/regulat| | |
|ors | | |
Option B: Make amendments so that electronic communication may
be used for communications between insurers and insureds
| |Benefits |Costs |
|Consumers |Savings for |Possible greater |
| |insurers from use |risk in some cases |
| |of electronic |that cover will be |
| |communications |inadvertently lost |
| |would be passed to |as a result of |
| |consumers in the |electronic |
| |form of lower |statutory |
| |prices[+1] |communications not |
| | |being received or |
| | |their importance |
| | |not recognised by |
| | |the insured [-1] |
|Insurers |Administrative | |
| |savings by use of | |
| |electronic means | |
| |for statutory | |
| |communications | |
| |rather than hard | |
| |copy correspondence| |
| |[+3] | |
|Government/regulators| | |
|Sub-rating |+4 |-1 |
|Overall rating |+3 |
Consultation
221. Removal of the current IC Act exemption from the scope of the ET
Act received wide support. There were no submissions in response
to the Review Panel's reports opposed to allowing for electronic
communications under the IC Act. However there were suggestions
from representatives of consumers and the legal profession that
allowing electronic communications should be subject to particular
safeguards, including the safeguards proposed by the Review Panel
in its final report.
222. Representatives of insurers submitted there should be no
requirement to provide notices in hard copy if the relevant insured
has consented to receive information electronically. This was
supported by other submissions. However, an insurance dispute
resolution body argued that no sanction should apply to an insured
until they had been sent a hard copy of the relevant notice or
acknowledged receipt of the notice through electronic means.
223. Following the release of the exposure draft bill for consultation,
life insurance industry representatives suggested that the annual
review notice could still be required to be provided in hard copy.
Conclusion and recommended option
224. Option A is not preferred because:
. general government policy, as reflected in the Electronic
Transactions Act 1999, is to facilitate electronic
transactions; and
. the potential cost savings in permitting electronic
communication to be used for IC Act purposes are
significant.
225. Option B would allow for electronic communications in accordance
with the requirements of the ET Act. However, a number of
submissions argued that insurance contacts warranted additional
safeguards. The main issue of concern was that the failure of a
consumer either to receive or react appropriately to a statutory
communication under the IC Act might, in some cases, lead to
inadvertent loss of cover and, if the cover had to be called upon
due to a claim arising, they would face major financial
difficulties. For example, it was argued strongly by consumer
representatives and some lawyers that communications required under
the IC Act, which are sent electronically, should be capable of
being printed and retained. However, responses to the February
2007 exposure draft Bill argued that the requirements of the ET Act
are sufficient to address these concerns.
226. A further counter-argument against additional safeguards is that
electronic communications are more likely to be promptly read and
recognised than hard copies.
Objective component of insured's duty of disclosure
Problem
227. A number of submissions to the Review Panel, particularly those
from advocates for insureds, argued that the current tests for the
duty of disclosure (particularly those under subsections 21(1) and
21A(4) of the IC Act) impose an unreasonable burden on insureds to
know what an insurer regards as relevant to its decision whether to
enter a contract of insurance.
228. Section 21, which applies to all contracts of insurance, requires
an insured to disclose every matter that they know, or in the
circumstances could reasonably be expected to know, would be
relevant to the insurer's decision whether to accept the risk and
enter the contract.
229. Section 21A, which applies in respect of eligible contracts of
insurance,[6] precludes an insurer from making open-ended requests
for an insured to disclose 'any other matter'. However, the
insurer may still seek disclosure of 'exceptional circumstances'
that the insured, or a reasonable person in the circumstances,
would be expected to know are relevant to the insurer's decision
whether to accept the risk (subsection 21A(4)).
230. Disclosure is a significant issue in a number of insurance-related
disputes. In a submission responding to the Review Panel's issues
paper, the Consumers' Federation of Australia (CFA) estimated that
around 13 per cent of determinations made by the then General
Insurance Inquiries and Complaints Service Ltd (IEC) involved
disputes regarding disclosure.[7] More recently, the Financial
Ombudsman Service has advised that in the year ending June 2009, 4
per cent of disputes determined by the General Insurance Division
of the Service related to 'non-disclosure on proposal', and a
further 2 per cent related to 'disclosure issues'. In the ended
ending June 2009, about 4.5 per cent of disputes determined by the
former Insurance Ombudsman Service related to 'non-disclosure on
proposal'.
231. The CFA argued that no other consumer contract imposes a burden on
the consumer to know what information the other party requires when
deciding whether to enter the contract. The CFA noted that in the
case of consumer credit, consumers must answer the credit
provider's questions accurately but are not expected to know what
other information the credit provider needs to assess the loan
application.
232. The CFA also argued that the IC Act provisions concerning
disclosure fail to take account of technological advances such as
data processing and the internet, which have placed insurers in an
even better position to assess risk.
233. Requiring potential insureds to disclose all information relevant
to an insurer's decision, when those persons are not necessarily in
a position to assess what type of information may be relevant, can
result in unfair outcomes for insureds, for example, where a claim
is denied or reduced as a result of the failure to disclose.[8]
Objective
234. The objective is to ensure that the duty of disclosure requirements
in the IC Act strike an appropriate balance between, on one hand,
ensuring insurers have reliable information to assess and price
risk and, on the other hand, the need to avoid placing unfair
burdens on insureds in respect of the remedies available against
them for non-disclosure.
Options
Option A: Do nothing
235. No changes would be made to the objective elements of the insured's
duty of disclosure tests in sections 21 and 21A.
Option B: Replace the general duty to disclose in section 21 with a
requirement to answer specific questions honestly and fully
236. Under this option, the general duty of disclosure in section 21
would be replaced with a duty on insureds to answer fully and
honestly questions that are put to them by the insurer. If that
were to happen, section 21A, which applies such a framework to
eligible contracts of insurance, would no longer be necessary.
Option C: Clarify the operation of the mixed objective/subjective
duty of disclosure test in section 21
237. Under this option, the current mixed objective/subjective duty of
disclosure that applies to insureds under section 21 would be
retained. However, the application of the test would be elucidated
by requiring reference to non-exclusive factors, including the
nature of the particular cover being provided.
Option D: Remove that part of section 21A that permits insurers to
ask 'catch all' questions in relation to eligible contracts of
insurance
238. This option would discourage insurers that offer eligible contracts
of insurance from asking general 'catch all' questions concerning
'exceptional circumstances'. Insurers would no longer be able to
rely on the duty of disclosure in relation to eligible contracts of
insurance if they ask the insured to disclose 'exceptional
circumstances' in circumstances such as described by the current
paragraph 21A(4)(b).
Impact analysis
Impact group identification
Affected groups:
. insurers;
. insureds, including proposed insureds and beneficiaries
under policies; and
. government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Consumers | |Leaving the current|
| | |duty of disclosure |
| | |test unchanged may |
| | |continue to |
| | |unfairly |
| | |disadvantage some |
| | |insureds if they |
| | |fail to disclose a |
| | |matter they do not |
| | |realise is relevant|
| | |to an insurer's |
| | |decision whether to|
| | |enter the contract |
| | |of insurance |
|Insurers |Insurers sometimes |Courts may continue|
| |benefit from the |to have different |
| |objective elements |interpretations |
| |of the existing |about the factors |
| |duty of disclosure |to consider in |
| |test to deny claims|relation to the |
| | |objective element |
| | |of the duty of |
| | |disclosure, which |
| | |leads to a lack of |
| | |uniformity in |
| | |application of the |
| | |IC Act |
|Government/regulators| | |
Option B: Replace the general duty to disclose with a requirement
to answer specific questions honestly and fully
| |Benefits |Costs |
|Insurers |Fewer disputes and|Applying this |
| |legal actions by |option to large |
| |insureds |commercial risks, |
| |concerning their |and in respect of |
| |obligation to |some life insurance|
| |disclose matters |products, |
| |that were |practicable |
| |considered |extremely costly |
| |relevant by the |for insurers, as it|
| |insurer [1] |would require them |
| | |to construct |
| | |lengthy and complex|
| | |specific questions |
| | |to ensure all |
| | |relevant |
| | |information is |
| | |obtained [-3] |
|Insureds |Fewer disputes |Insurers may |
| |about an alleged |require consumers |
| |failure to |to respond to more |
| |disclose relevant |lengthy and complex|
| |matters [1] |sets of questions |
| | |[-2] |
| | |Less availability |
| | |of insurance and |
| | |higher costs for |
| | |insureds, |
| | |especially in |
| | |non-eligible lines |
| | | |
| | |[-2] |
|Government/regulators|Frequency of | |
| |disputes regarding| |
| |disclosure could | |
| |reduce and ease of| |
| |resolution could | |
| |increase [1] | |
|Sub-rating |+3 |-7 |
|Overall rating |-4 |
Option C: Clarify the operation of the mixed objective/subjective
duty of disclosure test in section 21
| |Benefits |Costs |
|Insurers |Reduction in |This option may |
| |frequency and |lead to some |
| |complexity/cost of |litigation about |
| |disputes [1] |interpretation of |
| | |the new objective |
| | |factors [-1] |
|Insureds |Reduction in |This option may |
| |frequency and |lead to some |
| |complexity/cost of |litigation about |
| |disputes [1] |interpretation of |
| | |the new objective |
| | |factors [-1] |
|Government/ |Ease of | |
|regulators |interpretation and | |
| |reduction of | |
| |inconsistencies | |
| |between factors that | |
| |are taken into | |
| |account in | |
| |determining an | |
| |insured's duty of | |
| |disclosure is likely | |
| |to result in more | |
| |efficient | |
| |adjudication [2] | |
|Sub-rating |+4 |-2 |
|Overall rating |+2 |
Option D: Remove the part of section 21A that permits insurers to
ask 'catch all' questions in relation to eligible contracts of
insurance
| |Benefits |Costs |
|Insurers | |For some insurers |
| | |under eligible |
| | |contracts, being no|
| | |longer able to rely|
| | |on 'catch all' |
| | |questions may |
| | |encourage them to |
| | |formulate more, or |
| | |more complex, |
| | |specific questions |
| | | |
| | |[-1] |
|Insureds |Insureds under eligible |Possibility of |
| |contracts will not be |having to answer a |
| |disadvantaged by being |larger number, or |
| |required to answer |more complex, |
| |questions that require a|questions [-1] |
| |knowledge of what | |
| |factors may be relevant | |
| |to an insurer's decision| |
| |[+2] | |
|Government |Frequency and complexity| |
|/regulators |of disputes that need to| |
| |be adjudicated regarding| |
| |the duty of disclosure | |
| |will be reduced [+1] | |
|Sub-rating |+3 |-2 |
|Overall rating |+1 |
Consultation
239. Option B was supported by stakeholders including representatives of
insurance brokers, and a legal aid commission. It was argued that
insurers should be required to ask insureds specific questions that
reflect their underwriting guidelines. Insurers that offered
insurance over large commercial risks disagreed. They provided
examples suggesting that, in those cases, questions were formulated
and asked in the course of negotiating the relevant contract of
insurance. It was not possible to produce a 'pro-forma' list of
questions at the outset capable of dealing with all relevant risk
factors that may affect the policy proposal.
240. Option C was suggested to the Review Panel by a firm of commercial
solicitors. They noted the existing test in section 21 had been
applied inconsistently by various courts, which runs counter to the
policy intention that the law concerning contracts of insurance
should apply uniformly throughout Australia.
241. In respect of eligible contracts of insurance, one general insurer
reported to the Review Panel that it asked potential insureds
specific questions and did not have a 'catch all' question (Option
D). That insurer argued the 'catch all' question was no longer
relevant to eligible contracts. Insurers offering that type of
contract had 'clear underwriting guidelines based on comprehensive
historical data that effectively define what information a
prospective customer needs to provide to enable a risk to be
accepted'. This view was not shared by other general insurers and
their representative body, which submitted to the Panel that it
would not be possible for many insurers to develop a list of
relevant specific questions.
242. In response to the exposure draft Bill, few stakeholders commented
on this particular amendment and at least one major insurer
supported the way the Bill gave the Review Panel recommendation
effect. The general insurers' representative body offered no
additional information on how the removal of the 'exceptional
circumstances' question would impose costs on insurers.
Conclusion and recommended options
243. Option B (replacing the general duty of disclosure with a duty to
answer specific questions) is unlikely to be practicable to apply
more widely than in relation to eligible contracts. In particular,
it would not appear to be practical to apply Option B in the
context of large commercial insurance and some types of individual
life insurance. Accordingly, Option B is rejected.
244. Option C, under which the duty of disclosure would be clarified by
setting out some non-exclusive factors in the Act to which regard
should be had in applying the duty test, does not result in greater
expenses for insurers. This option is designed to assist courts in
interpreting how the duty applies in difficult cases and should
assist to remove current inconsistencies in the application of the
test between courts and promote uniform application of the IC Act
throughout Australia.[9]
245. Option D would address concerns about the duty of disclosure rules
incorporating an objective test that requires insureds to know what
an insurer regards as relevant, at least in respect of personal
lines insurance (eligible contracts). Although some insurers have
strongly opposed Option D on the grounds that it would increase
expenses, others have noted that in the case of personal lines
insurance, insurers generally have a very strong understanding of
what factors are relevant to the risk in question, and ask specific
questions accordingly. The likelihood of any unforseen factors
being relevant to risk is not high, and to the extent that it
exists, there is a cogent argument that it is most appropriately
borne by the insurer rather than the insured.
246. Option C is recommended because further guidance in interpreting
provisions in the IC Act dealing with disclosure is likely to be of
benefit to insurers, insureds and courts. Further, the costs of
applying this option are not great. Option D (removing the ability
to ask for disclosure of exceptional circumstances) is also
recommended, because it largely addresses concerns from the
insureds' perspective regarding the objective component of the duty
of disclosure in respect of eligible contracts, notwithstanding
there are some costs associated with its implementation.
Disclosure obligations on renewal of an eligible contract of insurance
Problem
247. The then General Insurance Enquiries and Complaints Service Ltd
(IEC) (a predecessor of the Financial Ombudsman Service), in its
first submission to the Review Panel, raised concerns at the
current law surrounding notice of the duty of disclosure upon
renewal of a contract of insurance. The IEC stated:
'... the experience of (IEC) Review Panel members is that the
great majority of people regard a renewal notice in the same way
as they would a gas bill, that is an account to be paid at or
about the due date, although unlike the gas bill, a reminder
notice is usually not issued if the sum payable is not paid
within the prescribed time. In other words, the general public
do not understand the renewal process creates a new insurance
contract, sometimes with new policy terms, with new disclosure
obligations.'
248. In its submission, the IEC noted instances of insureds under motor
vehicle policies being denied claims because they failed to update
their driving history as required upon renewal. Apparently this
was due to a lack of awareness of the disclosure requirement,
rather than any deliberate concealment on their part.
249. To have circumstances such as these continuing to arise is
undesirable because the detriment to the persons concerned is
potentially great. If insureds do not realise that they are under
a new set of disclosure obligations upon renewal of a contract of
insurance, they risk failing to inform the insurer of matters that
have occurred since the relevant contract was entered into that are
relevant to the insurer's decision whether to accept the risk of
the renewed contract. As a consequence, the insured may be denied
the right to recover under the contract, to potentially great
detriment to the insured and any other person with an interest in
the particular insurance contract.
250. An examination of statistics published by an external dispute
resolution body is indicative of the extent to which non-disclosure
on renewal leads to disputes between insurers and insureds. For
the period July 2005 to June 2006 in relation to which the former
Insurance Ombudsman Service - the IOS - reported on disputes
determined by the scheme during that period with 'Non-disclosure on
proposal' as a reason members denied liability, in total, 53 out of
107 disputes relating to alleged non-disclosure involved
renewals.[10]
Objective
251. The objective is to ensure that, as much as possible, insureds
renewing an eligible contract of insurance understand their duty of
disclosure obligations.
Options
Option A: Do nothing
252. The requirement on insurers under an eligible contract of insurance
to ask specific questions of the insured - if they wish to rely on
the insured's duty of disclosure - would not apply on renewal of
the particular eligible insurance contract.
Option B: Make the obligation to provide details regarding the duty
of disclosure the same at both inception and renewal of an eligible
contract of insurance
253. Under this option, renewal of an eligible contract of insurance
would trigger duty of disclosure obligations for both insurers and
insureds similar to the obligations that applied when the contract
was first entered into.
254. For example, under this option, an insurer wishing to rely on an
insured's duty of disclosure at renewal of an eligible contract
would need to ask the insured specific questions or, alternatively,
seek an update to the answers the insured had provided at the
inception of the contract.
Impact analysis
Impact group identification
Affected groups:
. insurers;
. insureds; and
. government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Insurers |Minimal administrative| |
| |burden to take | |
| |advantage of duty of | |
| |disclosure on renewal | |
| |of eligible contracts | |
|Insureds | |Disadvantage for |
| | |some insureds who |
| | |are denied claims |
| | |because they did |
| | |not realise their |
| | |duty of disclosure |
| | |obligations on |
| | |renewal of eligible|
| | |contacts |
|Government/ | | |
|regulators | | |
Option B: Make the obligation to provide details regarding the duty
of disclosure the same at both inception and renewal of an eligible
contract of insurance
| |Benefits |Costs |
|Insurers |Insurers would receive |Changes to |
| |better information |administrative |
| |about the risks |procedures for |
| |associated with renewal|renewals of |
| |of a particular |eligible contracts |
| |eligible contract [1] |that could, for |
| | |some insurers, |
| | |involve significant|
| | |costs |
| | |[-2] |
|Insureds |Insureds would no |Possible increases |
| |longer face denial of a|in premiums passed |
| |claim because they did |on by some insurers|
| |not realise that the |due to increased |
| |duty of disclosure |costs [-1] |
| |applies on renewal of | |
| |an insurance contract | |
| |[3] | |
|Government/ |Reduction in dispute | |
|regulators |resolution regarding | |
| |the disclosure | |
| |requirements on renewal| |
| |of eligible contracts | |
| |[1] | |
|Sub-rating |+5 |-3 |
|Overall rating |+2 |
Consultation
255. In submissions to the Review Panel, a consumer representative body
and a legal aid commission expressed support for the amendment
proposed in Option B. The legal aid commission noted that, in its
experience, many insureds were unaware of their duty of disclosure
obligations on renewal and assumed that it was an automatic
process, subject to payment of the premium. Insurance broker
representatives submitted the IC Act should be amended so that
insurers must make clear in any renewals the consequences of non-
disclosure.
256. General insurer representatives submitted that requiring insurers
to ask specific questions on renewal would result in significant
increases in the costs incurred by insurers.[11] The additional
costs would ultimately be passed on to insureds.
Conclusions and recommended options
257. Option B would result in the duty of disclosure obligations (such
as the requirement to ask specific questions for eligible
contracts) applying at renewal, as well as inception.
258. If Option B were adopted:
. insurers would be better advised of factors affecting the
risk associated with a particular contract of insurance;
and
. insureds would be less likely to be disadvantaged when
making a claim because they failed to disclose adequately
on renewal.
- However, the change would result in costs for insurers
because they would need to ask insureds to update
answers provided at inception of the contract, or on
last renewal, rather than relying on the general duty of
disclosure in section 21 of the IC Act. Notwithstanding
the prospect of increased administrative costs, Option B
is recommended because:
. some general insurers either do not seek to rely on the
duty of disclosure on renewal for lines of eligible
contracts, or already adopt the practice of seeking an
update to answers provided previously, so the potential
for increased costs to insureds involved in changing
processes would depend on the systems processes individual
insurers have in place for handling renewals where
practices such as these are not currently employed; and
. the measure would avoid the possibility of significant
detriment for insureds as a result of a failure to comply
with the general duty of disclosure obligations applying
on renewal, due to ignorance about their existence.
Notification of duty of disclosure
Problem
259. Section 22 of the IC Act requires insurers to clearly inform
prospective insureds of the general nature and effect of the duty
of disclosure before the insured enters the relevant contract of
insurance.
260. A legal aid commission noted in a submission to the Review Panel
that, in its experience, many insureds assume they have complied
with their duty of disclosure obligations when they disclose all
facts known to the insured at the time of filling out a proposal
form or answering an insurer's questions during a preliminary
telephone application interview. However, matters that are
relevant to the insurer's decision to accept the risk and enter the
contract may arise after the date of application for the policy and
the date it comes into effect, for example, significant changes in
the state of an insured's or a life insured's health. It is quite
common for insureds to fail to disclose such matters because they
mistakenly believe they are under no obligation to do so.
Ignorance about the duration and scope of the duty of disclosure
was a common misconception.[12]
261. Thus, many insureds will inadvertently fail to disclose facts that
may come to light after the insured completes the proposal process
but before the contract of insurance comes into effect and, as a
consequence, may be in breach of their duty of disclosure. The
result of such ignorance on the part of some insureds, coupled with
prolonged delays between application and the issuing of the
insurance policy (the Review Panel was made aware that in some
circumstances the time between providing the relevant disclosure
and the commencement of the contract of insurance can be some
months), may mean that claims and even entire policies may be
jeopardized to the serious detriment of insureds or their
dependants and beneficiaries. This is particularly important for
beneficiaries of insurance linked to superannuation and dependants
receiving or expecting to receive death benefits from life
insurance policies applied for years prior to a claim being made on
the policy.
262. Instances of disputes involving alleged breaches of disclosure
(both innocent and fraudulent) where prolonged delays occurred have
arisen before the life insurance and superannuation external
dispute resolution schemes, in particular, the former Financial
Industry Complaints Service (FICS) - now part of the Financial
Ombudsman Service) and the Superannuation Complaints Tribunal.
Cases have also arisen before the Australian courts involving
ignorance of the extent of the insured's duty of disclosure where
delays have been found to be a factor in disputes involving alleged
breaches of the duty.[13]
263. Delays can be caused by both insurers and insureds. The problem
tends to occur more frequently in certain lines of business, for
example, in life insurance and in directors' and officers' (D&O)
liability insurance, mainly because of the extended nature of the
assessment process in those business lines. Delays may be caused
by the insurer where time -consuming processes are involved, such
as, example, collecting declarations from directors for D&O
liability insurance or collecting medical disclosures in relation
to life insurance policies. Delays may also be caused when
negotiations are extended where the insurer makes a counter-offer.
264. Delays may be caused by the insured where, for example, a written
application is posted many weeks after the blank application form
had been provided to the insured, or where the insured has provided
incomplete responses to questions or made mistakes in completing
forms or failed to append their signature to a paper form.
265. Some of the determinations of the external dispute resolution
schemes indicate that the policy/proposal wording used by many
insurers is not clear about the scope of the disclosure obligation.
The extent to which this may disadvantage consumers is accentuated
when delays occur. While negative outcomes for consumers may be
attenuated by the proposed reform that would require insurers to
clearly inform the insured, before a contract is entered into, that
their duty of disclosure applies until the proposed contract is
entered into, this may not of itself alleviate those cases where
there is a prolonged delay between the time an application is made
and the concluding of the contract, particularly where this is
coupled with lack of understanding or ignorance of the insured's
duty of disclosure.
266. If no action is taken, failure to provide requisite disclosures for
events that took place between the date of the initial application
and the time the contract was entered into will continue to be one
of the reasons that the claims of some insureds are jeopardised.
The Review Panel noted that although some insurers ask the insured
immediately prior to the policy coming into effect whether they
have anything additional to disclose since filling out the original
proposal form, this is not a universal practice.
Objective
267. The objective is to ensure, so far as is reasonably possible, that
insureds are not disadvantaged when a claim arises because they did
not understand their duty of disclosure obligations where there was
a delay between the date they initially applied for the insurance
and the date the contract was entered into.
Options
Option A: Do nothing
268. This option would retain the current rule that insurers must advise
prospective insureds of their duty of disclosure at the time the
insured submits an application for insurance. There is no further
requirement for a reminder at the time the policy is issued.
Option B: Require insurers to issue reminders concerning the duty
of disclosure at the time the relevant contract is issued
269. Under this option, insurers would be required to provide to the
insured, at the time the contract of insurance is issued, a
reminder that the duty of disclosure continues until the time that
the policy is entered into, unless the contract is entered a short
time after the person initially applied for insurance.
Option C: Require insurers to use clearer language as to when the
duty applies in the initial notification
270. Under this option, there would be no need for an additional
reminder when the policy is issued as proposed by Option B.
However, insurers would need to clearly state when explaining the
insured's duty of disclosure that it extends until the time the
contract of insurance is entered into.
Impact analysis
Impact group identification
Affected groups:
. insurers;
. insureds (especially those that have claims), including
proposed insureds and beneficiaries under policies; and
. government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Insurers | | |
|Consumers | |Claims by some |
| | |insureds will |
| | |continue to be |
| | |jeopardised due to |
| | |non-disclosure |
|Government/regulators| |Ongoing need to |
| | |resolve disputes |
| | |about |
| | |non-disclosure of |
| | |events between |
| | |application and |
| | |contract |
Option B: Require an additional reminder at the time the policy is
issued
| |Benefits |Costs |
|Insurers |An reminder |Possible |
| |notification increases|additional |
| |the likelihood that |administrative |
| |insurers will be |costs. Note |
| |properly advised of |that some |
| |relevant factors |insurers |
| |necessary to assess |already issue a|
| |risks [1] |reminder where |
| | |delays have |
| | |occurred after |
| | |the initial |
| | |application |
| | |[-2] |
|Insureds |Significant reduction | |
| |in claim denials due | |
| |to a failure to | |
| |understand that the | |
| |duty of disclosure | |
| |extends until the | |
| |policy is entered into| |
| |[3] | |
|Government/regulators|Likely reduced need to| |
| |resolve disputes | |
| |involving a failure to| |
| |disclose events | |
| |between application | |
| |and contract [1] | |
|Sub-rating |+4 |-2 |
|Overall rating |+2 |
Option C: Require insurers to use clearer language as to when the
duty applies in the initial notification
| |Benefits |Costs |
|Insurers | |Insurers would |
| | |incur one-off |
| | |administrative |
| | |expenses required |
| | |to change reminder |
| | |wordings [-2] |
|Insureds |Likely reduction in| |
| |claim denials due | |
| |to a failure to | |
| |understand that the| |
| |duty of disclosure | |
| |extends until the | |
| |policy is entered | |
| |into [2] | |
|Government/regulator|Likely reduced need| |
| |to resolve disputes| |
| |involving a failure| |
| |to disclose events | |
| |between application| |
| |and contract [1] | |
|Sub-rating |+3 |-2 |
|Overall rating |+1 |
Consultation
271. General insurance industry representatives argued the benefits of a
change such as proposed by Option B were not significant enough to
justify the costs. Option B would require a change in the
compliance requirements of insurers that was disproportionate to
the benefits that may flow from such an amendment. A submission
made in relation to the February 2007 exposure draft Bill argued
that sending a reminder notice was unnecessary, problematic and
administratively costly.[14]
272. However, other submissions, including from legal profession
representatives and a dispute resolution body, supported reform of
the type proposed in Option B. One submission noted that an
amendment such as Option B could be expected to lead to a reduction
in the number of disputes.
273. Life insurance industry representatives indicated to the Review
Panel that the majority of life insurers already included advice to
prospective applicants that their duty of disclosure continues
until the date the contract is entered into, such as that proposed
in Option C.
Conclusions and recommended options
274. Many insureds do not realise that their duty of disclosure extends
until the contract is entered into, so that if the policy is issued
some time after a proposal form is submitted, the insured may be
exposed to the denial of a claim if they failed to disclose a
relevant fact that arose (or which they became aware of) during the
interim period. A failure to disclose could lead to loss of the
insurance cover altogether through avoidance of the policy by the
insurer.
275. Option B minimises this risk by requiring insurers to give insureds
a reminder of the duty at the time the contract is issued (unless
the contract is issued within a short time of receiving the
proposal). This option would generate additional administrative
expenses for insurers.
276. Option C goes some way toward addressing the problem by having the
initial notice of the duty state more clearly that the duty extends
until the time the contract is issued. The additional
administrative expenses associated with Option C would be less than
those associated with Option B, but Option C is likely to be less
effective than a reminder at the time the policy is issued,
especially when the contract is entered into some time after the
proposal form is submitted.
277. Typically, the insurer would communicate with the insured at the
time the proposal is accepted by the insurer to notify the insured
of the acceptance and to request payment. At this time, the
insurer could add an additional 'standard' element to that
communication regarding the fact that the duty of disclosure
extended until the relevant contract was entered into. Therefore,
the additional costs of complying with Option B (after a
transitional phase) are not expected to be great.
278. On balance, Option B is favoured.
Non-disclosure rules and life insureds
Problem
279. Misrepresentations by a 'life insured' (that is, a person other
than the insured whose life is insured under the contract of life
insurance) are treated as if they were made by the insured
themselves pursuant to section 25 of the IC Act. As a consequence,
if a life insured is found to have made a misrepresentation to an
insurer, the insurer has the same remedies against the insured as
if the misrepresentation had been made by the insured. However,
under the current law, there is no remedy against the insured where
the life insured fails to disclose some matter that is relevant to
an insurer's decision whether to enter the contract of life
insurance.
280. Non-disclosure by a life insured may adversely affect the
reliability of information available to insurers. In that regard,
non-disclosure has a similar result to misrepresentation.
Preventing non-disclosure by life insureds would help ensure that
insurers are fully informed about the relevant risks so they can
price them accordingly.
281. An expansion of section 25 to include non-disclosure by a life
insured would provide a fairer balance between the interests of the
parties. The reason is that insurers must still satisfy a claim
under a contract of life insurance, notwithstanding that there has
been a non-disclosure by the life insured that, if made by the
insured, would have allowed the insurer the right to avoid the
contract or reduce their liability.
282. There appears to be no reason why non-disclosure and
misrepresentation on the part of the life insured should be treated
differently and for the current disparity with respect to
misrepresentation and non-disclosure by life insureds to continue.
283. If no change is made, then the degree of information asymmetry as
between the parties would not be reduced and the current disparity
of remedies for insurers with respect to misrepresentations and non-
disclosures by life insureds would continue, resulting in unfair
and anomalous outcomes.
Objective
284. The objective is to ensure that insurers receive reliable and
adequate information to assess and price risk, without placing an
unfair burden on insureds in respect of the remedies available
against them for non-disclosure.
Options
Option A: Do nothing
285. This option would leave section 25 of the IC Act unchanged so that
it continued to apply only in respect of misrepresentation by a
life insured, but not in respect of non-disclosure by a life
insured. Also, there would be no obligation on insurers to give
the life insured notice of the duty of disclosure.
Option B: Expand the duty of disclosure under section 25 to cover
non-disclosure by a life insured
286. Under this option, the rule in section 25 of the IC Act that
imputes a misrepresentation by a life insured to an insured would
also apply to a non-disclosure by the life insured. Further, the
insurer would be required to give the life insured notice of the
duty of disclosure before the relevant insured entered into the
contract of insurance.
287. Section 22 of the IC Act would be amended to require the insurer to
clearly inform the life insured of their proposed new duty of
disclosure.
Impact analysis
Impact group identification
Affected groups:
. insurers;
. insureds (including life insureds and prospective life
insureds); and
. government/regulators.
Assessment of costs and benefits
Option A: No specific action
| |Benefits |Costs |
|Insurers | |Insurers would |
| | |continue to be |
| | |disadvantaged in |
| | |some cases by |
| | |non-disclosures by |
| | |life insureds that |
| | |cannot be imputed |
| | |to the insured |
|Insureds | | |
|Government/regulators| | |
Option B: Expand the duty of disclosure under section 25 to cover
non-disclosure by a life insured
| |Benefits |Costs |
|Insurers |Insurers would |The proposed |
| |benefit by being |additional |
| |able to rely on |requirement that |
| |non-disclosures by |insureds notify life |
| |life insureds as a |insureds of the duty |
| |defence to claims, |of disclosure would |
| |as well as their |result in additional |
| |current right to |compliance costs for |
| |rely on |insurers [-2] |
| |misrepresentations | |
| |[3]. | |
|Insureds |The savings to |Additional compliance|
| |insurers by denying |costs for insurers |
| |claims for |may lead to increased|
| |non-disclosure by |premiums for |
| |life-insureds could |consumers [-1] |
| |lead to risk | |
| |premiums for | |
| |consumers [1] | |
|Sub-rating |+4 |-3 |
|Overall rating |+1 |
Consultation
288. In submissions to the Review Panel, life insurance industry
representatives strongly supported amending the IC Act in the
manner proposed by Option B.
289. Representatives of the legal profession submitted that further
evidence and consideration were necessary before Option B were
considered. A consumer representative body argued there was no
empirical evidence to suggest the current formulation of section 25
had caused problems for insurers, and a legal aid commission also
opposed any reform of the type proposed in Option B.
Conclusions and recommended options
290. Non-disclosure by a life insured may have a similar result to that
of a misrepresentation by the life insured, in that a non-
disclosure may also adversely affect the reliability of information
available to insurers to price their risk. Reducing information
asymmetry between parties to a contract will achieve a fairer
result for the parties and also third party beneficiaries.
291. Option B ensures that non-disclosure by a life insured would have
similar ramifications to a misrepresentation. This will help to
ensure insurers are fully informed about the relevant risks so that
they can price them accordingly. Failure to disclose by a life
insured would have the same impact for insureds as a
misrepresentation by a life insured. Although life insureds would
be subject to a duty of disclosure to which they are not currently
subject, the non-disclosure would be imputed to the insured.
292. If a life insured's non-disclosure or misrepresentation is to be
imputed to an insured, then it follows that the life insured should
receive some notice that this may occur. A key principle
underlying the ALRC recommendations that gave rise to the IC Act
was that consumers should receive all the information relevant to
their contract of insurance and therefore the notice requirement in
Option B appears appropriate. Insurers would usually communicate
with life insureds about their disclosure obligations, so it is
reasonable that the insurer provide information about the duty
directly as part of that process, rather than relying on indirect
channels through the insured.
293. Although Option B does impose some additional costs for life
insurers (in relation to the notification obligation) and life
insureds (in respect of the broader duty), it is preferred over
Option A in order to ensure that non-disclosure by a life insured
is dealt with appropriately, and insurers may deny or reduce claims
in appropriate circumstances if non-disclosure by a life insured
occurs.
Life insurance remedies
Problem
294. The current provisions in the IC Act that deal with the remedies
available to a life insurer are of long standing. The life
insurance industry argues that the remedies are now inadequate and
inappropriate for many life insurance products now on the market.
295. Sections 29 and 30 of the IC Act provide remedies for life insurers
in relation to misstatements, misrepresentations and non-
disclosures. If there is a misstatement about the date of birth of
a life insured, section 30 provides for a remedy for the insurer,
based on the principle of proportionality, to vary the sum insured
or adjust/refund premiums. The remedies in section 29 deal with
pre-contractual misrepresentations and non-disclosure about
relevant matters other than age/date of birth. In summary:
. the only remedy for fraudulent non-disclosure or
misrepresentation is avoidance of the contract;
. the only remedies for innocent non-disclosure or
misrepresentation discovered within three years are either:
- a variation of the sum insured to an amount not less than
by a factor calculated by reference to the premiums
actually charged as a proportion of the premiums that
would have been charged if the non-disclosure or
misrepresentation had not occurred; or
- if the insurer would not have been prepared to enter into
a contract of life insurance on any terms it may avoid the
contract;
. there is no remedy for innocent non-disclosure or
misrepresentation discovered after three years.
296. The remedies in sections 29 and 30 derive from remedies formerly
available under the Life Insurance Act 1945. They were designed
for the 'traditional' life insurance products that were common at
the time the remedies were developed (for example, whole of life
and endowment policies). Traditional products such as these were
long term, provided for cover on death and had a surrender value.
A surrender value is, in effect, an investment (rather than a risk)
component that provides for an amount payable to an insured should
their contract be terminated before the end of its term.
297. Arguing that the remedies for non-disclosure are now inadequate and
inappropriate for many life insurance products now on the market,
life insurance industry representatives, in a submission to the
Review Panel, identified the following developments in the life
insurance market that had taken place since the IC Act commenced
operation:
. the increasing popularity of risk-only products such as income
protection (IP) and total and permanent disablement (TPD)
insurance, as well as trauma/critical illness and term life
insurance:
. the practice by some life insurers of selling multiple types of
cover within one contract (for example, 'bundled' contracts);
. the incidence of life insurance products allowing for more than
one life insured;
. the increasing proportion of policies taken out on a short term
basis; and
. developments in underwriting practices to take account of the
changing nature of life insurance products available.
298. The submission argued that the prescriptive and inflexible nature
of the remedies in section 29 no longer provides a fair balance
between the interests of insurers and insureds.[15] For example,
if different types of life cover are bundled in the same contract,
which often occurs[16], the section 29 remedies are not
sufficiently flexible to allow avoidance of the contract by the
insurer or correction of one cover that is affected by a non-
disclosure or a misrepresentation without affecting the other
cover(s) bundled in the same contract. [17]
299. Life insurance industry representatives also argued that the
relative inflexibility of remedies in section 29 frequently leads
to inequitable results for the insured. For example, if an insured
innocently failed to disclose that they were a smoker and this was
discovered by the insurer within three years, an appropriate remedy
could be to continue the insurance as initially agreed but to set a
higher premium rather than relying on the available section 29
remedy of reducing the sum insured: a harsher penalty for the
insured than may have been needed or appropriate in the
circumstances.
Objective
300. The objective is to ensure that remedies in respect of pre-
contractual misrepresentation and non-disclosure by insureds
provide adequate redress for life insurers but do not result in
penalties for insureds that are disproportionate to the loss
suffered by the insurer.
Options
Option A: Do nothing
301. Under this option, the specialised life insurance remedies in
section 29 would continue to apply to all types of life insurance.
Option B: Make remedies for breach of the duty of disclosure for
life insurance mirror the counterpart remedies for general
insurance
302. Under this option, the remedies for non-disclosure or
misrepresentation under a contract of life insurance would be
similar to remedies for non-disclosure and misrepresentation under
a contract of general insurance, providing an avenue whereby a
policy could be continued, albeit on terms that reflected the
position had non-disclosure or misrepresentation not occurred. In
the case of fraud, the insurer could avoid the contract.
303. In the absence of fraud, the insurer could, for example, impose an
exclusion so as to put the life insurer and the insured in the same
position they would have been in if the non-disclosure or
misrepresentation had not occurred, or could reduce its liability
to an amount that would restore the insurer to its original
position had no breach of the duty of disclosure occurred.[18]
This is a much more flexible remedy than the proportionate
reduction of the sum insured currently provided for in section 29.
304. If the remedy currently available to general insurers under
subsection 28(3) were applied, this would put the life insurer and
the insured in the same position they would have been if the non-
disclosure/misrepresentation not occurred in the first place,
providing protection for other policyholders in respect of the
cross subsidisation of spiralling claims costs by paying increased
premiums.
305. The three-year time limit for insurers to seek a remedy on the
basis of innocent non-disclosure or misrepresentation would be
removed.[19]
306. There would continue to be a distinct remedy in respect of fraud or
non-disclosure concerning age as currently applies under
section 30.
Option C: As per Option B, but retain specialised life insurance
remedies for policies that have a surrender value or provide death
cover
307. This option is like Option B, but the current remedies for life
insurance in section 29 would be retained for policies that have a
surrender value or provide death cover.[20]
308. If the policy has an aspect of cover with a surrender value and/or
death cover, and some other type of insurance cover as well, the
policy would be 'unbundled' for the purposes of considering the
application of remedies for breach of the duty of disclosure.
309. In addition, contracts could be 'unbundled' so that a
misrepresentation or a non-disclosure that was relevant to the risk
for one type of cover, for example, a misrepresentation about
assets relevant to income protection insurance, would not
necessarily apply to a different type of cover, provided as part of
the bundled policy, in relation to which the misrepresentation was
of no consequence or relevance.
310. Like Option B, section 30 would still apply to misstatements
regarding age. The three year limitation on remedies would apply
only to policies, or types of cover under a bundled contract, which
included a surrender value or death cover.
Impact analysis
Impact group identification
Affected groups:
. life insurers;
. insureds, including life insureds; and
. government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: Do nothing
| |Benefits |Costs |
|Insurers | |No scope for use of |
| | |less costly remedies |
| | |for life insurers |
| | |Lack of flexibility |
| | |of remedy can force |
| | |insurers to allege |
| | |fraud, with resultant|
| | |costly litigation |
| | |placing pressure on |
| | |premium rates |
|Insureds |The claims of |The lack of |
| |insureds under |flexibility in |
| |traditional policies|remedies for life |
| |and risk only term |insurance can result |
| |life insurance |in detriment to |
| |policies will |insureds who are |
| |continue to enjoy |subjected to a |
| |the protections |sanction more onerous|
| |offered under the |than necessary |
| |present remedies |The price and |
| |framework |availability of life |
| | |insurance may |
| | |continue to be |
| | |adversely affected |
| | |through lack of |
| | |access to more |
| | |appropriate remedies |
|Government/regulat| | |
|ors | | |
Option B: Make remedies for breach of the duty of disclosure for
life insurance mirror the counterpart remedies for general
insurance
| |Benefits |Costs |
|Insurers |This option would |There will be |
| |allow more |transitional |
| |flexibility in |administrative |
| |determining |costs for insurers |
| |remedies for breach|associated with |
| |of duty of |adopting a new |
| |disclosure allowing|remedies framework |
| |the use of less |[-1] |
| |costly remedies | |
| |[+3] | |
|Insureds |Increased |Removal of the |
| |flexibility of |specialised |
| |remedy may benefit |remedies and the |
| |insureds overall |protection offered |
| |through use of less|by the 'three year |
| |costly and less |rule' in section 29|
| |onerous remedies, |could produce |
| |and possible |inappropriate |
| |decrease in |outcomes in some |
| |premiums [+1] |cases (particularly|
| | |'traditional' life |
| | |insurance policies,|
| | |including those |
| | |with death |
| | |cover/surrender |
| | |value) to the |
| | |significant |
| | |detriment of some |
| | |insureds and their |
| | |beneficiaries [-3] |
|Government/regulators|Increased | |
| |flexibility of | |
| |remedy may lead to | |
| |less complex | |
| |dispute resolution | |
| |processes [+1] | |
|Sub-rating |+5 |-4 |
|Overall rating |+1 |
Option C: As per Option B, but retain specialised life insurance
remedies for policies that have a surrender value or provide death
cover
| |Benefits |Costs |
|Insurers |This option would |Dividing different |
| |allow more |types of life |
| |flexibility in |insurance cover |
| |determining |into categories, |
| |remedies for breach|including for the |
| |of duty of |purposes of |
| |disclosure allowing|'unbundling', |
| |less costly |increases |
| |remedies [+3] |complexity and |
| | |administration of |
| | |the legislation |
| | |[-1] |
|Insureds |Increased |The claims of some |
| |flexibility of |insureds, including|
| |remedy may benefit |those with |
| |insureds overall |beneficiaries, may |
| |through use of less|be detrimentally |
| |costly and less |affected by loss of|
| |onerous remedies, |protections offered|
| |and possible |under the present |
| |decrease in |remedies framework,|
| |premiums [+1] |though if surrender|
| | |value/death |
| | |policies retain the|
| | |prior remedies, |
| | |this would occur |
| | |rarely |
| | |[-1] |
|Government/regulators|Increased | |
| |flexibility of | |
| |remedy may lead to | |
| |less complex | |
| |dispute resolution | |
| |processes [+1] | |
|Sub-rating |+5 |-2 |
|Overall rating |+3 |
Consultation
311. There has been no clear consensus regarding the need to reform the
current remedies available to life insurers in respect of non-
disclosure and misrepresentation. The life insurance industry
strongly argues that there are significant deficiencies in the
current remedy arrangements given the range and type of life
insurance products currently on the market. In a submission to the
Review Panel, one life insurer noted that difficulties with the
current life insurance remedies may be affecting the cost and
availability of insurance (with consequent negative effects for
insureds).[21] Life insurance representatives argued that if the
remedy currently available to general insurers under subsection
28(3) of the IC Act were applied, this would put the life insurer
and the insured in the same position they would have been if the
non-disclosure/misrepresentation not occurred in the first place,
providing protection for other policyholders in respect of the
cross subsidisation of spiralling claims costs by paying increased
premiums.
312. However, consumer representatives opposed any change of the type
proposed by Options B or C. A consumer representative body
submitted that the distinction between remedies in respect of life
insurance and general insurance had historical foundations in that
it was an acknowledgement that the Life Insurance Act 1945 already
regulated life insurer conduct. Consumer representatives
questioned whether the current remedies are as restrictive as
claimed by members of the life insurance industry and expressed
concern about the impact of changes to the protections currently
available to insureds.
313. It was argued that life insurance, even the types of life insurance
that are akin to 'pure risk', involve more complex disclosures than
an ordinary general insurance product. Therefore, life insureds
require greater protections than general insureds in relation to
remedies for breaches of the duty of disclosure and, in particular,
the protection offered by the 'three year rule' should be retained
for all life insurance.
Conclusions and recommended options
314. The problem is that the remedies available to life insurers under
the IC Act for non-disclosure or misrepresentation do not
adequately take into account the changed nature of life insurance
products and, as a result, unnecessarily limit the availability of
life insurance or increase its cost.
315. Option A would involve no change to the current remedies and, as a
consequence, the concerns regarding the inflexible nature of life
insurance remedies would remain. Option B would involve removing
the current distinction between remedies for a breach of the duty
of disclosure in life insurance and general insurance so that the
remedies are the same. Option C is similar to Option B, although
Option C would leave the existing life insurance remedies available
for particular types of cover (namely, life policies with a
surrender value and those with a death cover component).
316. It is accepted that the current remedies for breaches of the duty
of disclosure in life insurance (not related to age) unnecessarily
restrict the remedies available to insurers in the context of some
types of cover. However, the restricted and specialised remedies
offered in relation to life insurance policies with a surrender
value and/or death cover remain appropriate and provide useful
protections to insureds. The benefits of freeing up the remedies
in other cases outweigh the costs of moving to a bifurcated system,
with the added complexity of 'unbundling' the components of
policies. The risks of unfairly disadvantaging insureds by
removing the protections currently provided is not considered great
in respect of policies that do not have a surrender value.
Third party beneficiaries
Problem
317. Third party beneficiaries are not parties to a contract of
insurance. Rather, they are specified in the contract as being
persons to whom insurance cover provided by the contract extends.
They may be, for example, employees who are covered by a personal
accident policy taken out by their employer or members of a
superannuation fund who receive life insurance cover under a policy
taken out by the trustee of the fund.
318. Although the IC Act deals with the entitlement of such persons to
make a claim, notwithstanding that they are not parties to the
contract (see section 48 as one example), there are few other
references to third party beneficiaries in the IC Act. It has been
suggested that their status as the primary object of insurance
cover in many instances may mean that third party beneficiaries
should have essentially the same rights and obligations as
insureds.
319. For example, it is arguable that an insurer should have a duty to
act in good faith towards a specified third party beneficiary, and
vice-versa, at least after the contract has been entered into.
320. As a result of the IC Act dealing with specified third party
beneficiaries to a limited extent, there is uncertainty about
aspects of the legal rights and obligations among the insurer, the
insured and the third party. Uncertainty leads to expensive
litigation and, although the precedents set by earlier litigation
provides guidance for later cases, there is often still room to
argue how a particular case should be resolved. Uncertainty of
outcomes ultimately leads to higher risk premiums being charged in
relation to the affected policies and also results in outcomes that
may be anomalous or inconsistent.
321. Inclusion of suitable contractual provisions to deal with third
party beneficiaries may provide a partial solution to the limited
application of the IC Act. However, as third party beneficiaries
are not parties to the contract, there are limitations to the scope
of contractual solutions.
Objective
322. The objective is to ensure that, to the extent reasonably
practical, third party beneficiaries under an insurance contract
have rights and obligations that are predictable and in keeping
with the context and intention of their relationships with both the
insurer and the insured.
Options
Option A: Do nothing
323. This option would retain the current position under which specified
third party beneficiaries are generally not covered by the IC Act.
Option B: Extend all rights and obligations of insureds under the
IC Act to specified third party beneficiaries
324. Under this option, specified third party beneficiaries would have
the same rights and obligations under the IC Act as if they were
the insured. The insurer would need to notify all third party
beneficiaries of their duty of disclosure before the relevant
contract is entered into. Further, in relation to eligible
contracts of insurance, all third party beneficiaries would need to
be notified of unusual terms in the contract.
Option C: Extend only certain rights and obligations under the IC
Act to specified third party beneficiaries
325. This option would treat specified third party beneficiaries as
insureds under the IC Act only for the purposes of:
. subrogation, in that the insurer would be able to
substitute for the third party beneficiary in an action
against a third party who is liable for a loss that has
been paid by the insurer;
. the duty of utmost good faith (but not pre-contractually);
and
. circumstances where the IC Act allows an insured to
request the insurer provide them with particular
information by way of written notice.
Impact analysis
Impact group identification
Affected groups:
. insurers;
. insureds (including specified third party beneficiaries
and insureds); and
. government and regulators, including self-regulatory
organisations.
Assessment of costs and benefits
Option A: No specific action
| |Benefits |Costs |
|Insurers | |Risk of unanticipated|
| | |outcomes, which may |
| | |require litigation to|
| | |resolve |
|Insureds | |Risk of unanticipated|
| | |outcomes, which may |
| | |require litigation to|
| | |resolve |
| | |Some increased risk |
| | |premium passed on to |
| | |insureds as a result |
| | |of uncertainty |
|Government/regulat| | |
|ors | | |
Option B: Extend all rights and obligations of insureds under the
IC Act to specified third party beneficiaries
| |Benefits |Costs |
|Insurers |Decreased risk of |Greater |
| |unanticipated |administrative |
| |outcomes regarding |expenses in |
| |claims by third |treating third |
| |party beneficiaries|parties as |
| |[2] |beneficiaries, for |
| | |example, due to the|
| | |requirements to |
| | |give notices pre- |
| | |and post- |
| | |contractually, |
| | |which may be |
| | |impractical to |
| | |apply [-3] |
|Consumers |Reduced uncertainty|Higher |
| |act can reduce |administrative |
| |litigation costs |costs are likely to|
| |and expenses and |be passed on to |
| |risk premiums [1] |customers [-2] |
| | |Insurers may cease |
| | |to offer some |
| | |products involving |
| | |multiple third |
| | |party |
| | |beneficiaries, |
| | |reducing the |
| | |opportunity for |
| | |insureds to manage |
| | |risk [-2] |
|Government/regulators|Increased certainty| |
| |may lead to less | |
| |complex dispute | |
| |resolution | |
| |processes [+1] | |
|Sub-rating |+4 |-7 |
|Overall rating |-3 |
Option C: Extend only certain rights and obligations under the IC
Act to specified third party beneficiaries
| |Benefits |Costs |
|Insurers |Decreased risk of |There would be some|
| |unanticipated |administrative |
| |outcomes regarding |costs arising from |
| |claims by third |the requirement to |
| |party beneficiaries|provide third party|
| |[+2] |beneficiaries with |
| | |notices in limited |
| | |circumstances [-1] |
|Insureds |Reduced uncertainty|Some additional |
| |about the status of|administrative |
| |third party |costs could be |
| |beneficiaries may |passed on to |
| |reduce litigation |insureds [-1] |
| |costs and premiums | |
| |[+2] | |
|Government/regulators|Increased certainty| |
| |may lead to less | |
| |complex dispute | |
| |resolution | |
| |processes [+1] | |
|Sub-rating |+5 |-2 |
|Overall rating |+3 |
Consultation
326. There was support from consumer and insurance industry
representatives for extending the duty of utmost good faith to
third party beneficiaries. However, concerns were expressed about
the practicalities of extending all rights and obligations of an
insured to third party beneficiaries. NIBA noted it would be
impractical to extend the duty of utmost good faith to pre-
contractual matters such as the duty of disclosure.
Conclusions and recommended options
327. The problem is that the current limited application of the IC Act
to third party beneficiaries has resulted in anomalies and
inconsistencies, and legal uncertainty.
328. The proposal in Option B would extend all rights and
responsibilities conferred on insureds under the IC Act to third
party beneficiaries. Although this would resolve the uncertainty,
it would have significant practical difficulties because the
identity of many third party beneficiaries will not be known until
after the contract is entered into. Option C avoids those
difficulties by only conferring on third party beneficiaries a
limited range of rights and obligations which do not involve
significant expense. Option A involves no change to the current
situation.
329. The preferred option is Option C. Concerns raised during the
initial consultation period regarding the expense and practical
difficulties of bestowing third party beneficiaries with all of the
rights and obligations held by insureds are justified. Option C
clarifies rights and obligations in a range of areas but could be
implemented without any significant cost burden for insurers or
consumers.
Summary of impacts
330. Elements of the proposals set out in the Bill will benefit both
insurers and insureds, without imposing significant ongoing
compliance costs on industry with flow-on impacts on premium
settings.
331. The key measures in the bill relate to
1. electronic communication;
2. objective component of insured's duty of disclosure;
3. disclosure obligations on renewal of an eligible contract of
insurance;
4. notification of duty of disclosure;
5. non-disclosure rules and life insureds;
6. life insurance remedies; and
7. third party beneficiaries.
332. Both insurers and insureds will benefit from the ability to use
electronic communication for various notice requirements under the
IC Act. Use of electronic communications has the potential to
lower costs related to use of hard copy communications and to
increase convenience for both insurers and insureds.
333. The Bill will clarify the insured's duty of disclosure, remove the
insurer's option to ask 'catch-all' questions and effectively
require specific questions to be asked on renewal. Insurers will
be required to remind insureds of their duty of disclosure where
there is a significant elapse of time between application and
contract.
334. Initially, some additional administrative costs will be placed on
insurers in terms of altering established processes for renewing
policies, which could flow through to increased premiums charged.
However, these measures are intended to strike an appropriate
balance between ensuring insurers have reliable information to
assess and price risk, while at the same time, avoiding an unfair
burden being placed on insureds in meeting their duty of
disclosure, with potential detrimental outcomes with respect to
claims.
335. Insurers, insureds and regulators would benefit from fewer and less
complex disputes relating to disclosure and ease of resolution
would increase. This could ultimately be reflected in lowered
costs to insurers, with this factored into premium rates.
336. Insurers will benefit from clarification of the remedies available
to them for non-disclosure by life insureds, who are not the
insured under life policies. More generally, insurers will benefit
from simplification of remedies for non-disclosure, with unbundling
of remedies allowing for greater flexibility and alignment of life
remedies with those available to general insurers more
realistically reflecting market realities, namely, bundling of
mortality and morbidity life insurance policies, and the almost
total contraction of the market for traditional life policies with
surrender values being replaced by short term, pure risk policies.
337. Holders of life insurance policies will benefit from less harsh and
inflexible remedies being available to insurers with respect to non-
fraudulent (innocent) non-disclosure, with insureds generally
benefiting from fewer cost pressures placed on premiums rates
(these are ultimately impacted by pursuit of expensive litigation
for alleged fraudulent non-disclosure necessitated by the current
rigid remedy regime).
338. It is expected that options to benefit third party beneficiaries by
clarifying rights and obligations in a range of areas could be
implemented without any significant cost burden for insurers or
consumers.
339. While some proposals in the Bill may result in an increase in
compliance costs, these are expected to be low when taken into
account in the broader context where the overall impact of the
changes is likely to lead to greater balance between insurers and
insureds and produce fairer outcomes for all parties to the
insurance contract and those affected by it.
Implementation and review
340. The recommended actions all require legislative amendments to the
IC Act.
341. No formal review has been scheduled. The operation of the IC Act
will be under continuous monitoring and adjustments or refinements
to the proposed amendments will be made as required.
-----------------------
[1] Australian Prudential Regulation Authority, Half Yearly General
Insurance Bulletin - June 2009.
[2] Australian Prudential Regulation Authority, Quarterly Life Insurance
Performance - September 2009.
[3] Australian Prudential Regulation Authority, Life Insurance Trends -
March 2008.
[4] Australian Law Reform Commission 1982, Insurance Contracts, ALRC 20,
Canberra, pp xxi-xxii.
[5] Press release C087/03, 10 September 2003, issued by the then Minister
for Revenue and Assistant Treasurer.
[6] 'Eligible contracts of insurance' are defined in regulation 2B of the
Insurance Contracts Regulations 1985.
[7] The Consumer Federation of Australia (CFA) in its submissions to the
Review Panel's March 2004 Issues Paper estimated that between January
1999 and April 2004, the external dispute resolution body, the IEC Claims
Review Panel, had made 642 determinations on claims that at least, in
part, considered disclosure. These determinations were broken down as
follows: Small business (21); Consumer credit (39); Home contents (170);
Home building (71); Marine (7); Motor vehicle (200); Motor vehicle TPPD
(1); Personal accident/sickness (102); Travel (27); Other (4).
The IEC Panel determined 936 claims in 2002-2003. The CFA extrapolated
that 642 claims over a five year timeframe is about 128 per year. 128/936
(the 2002-2003 figure) being 13.7 % - the figure the CFA noted
represented the percentage of claims each year that involved (in part)
disclosure issues.
In its 2006-2007 Annual Review (at page 10), the IEC (by then, the
Insurance Ombudsman Service - the IOS) noted that 'once again, with 35 %
of the total, motor vehicle disputes were the most highly represented at
IOS, followed by home building disputes (21%), travel disputes (18%) and
home contents disputes (12%). With respect to motor vehicle disputes,
the main reason for the insurer denying liability was related to
exclusion or condition (45%), with non-disclosure the next most
frequently cited reason for denying liability (15%), followed by fraud
(14%). (On 1 July 2008, the IOS was folded into the Financial Ombudsman
Service.)
[8] A majority of the High Court has taken the view that to require an
insured to disclose to an insurer every matter known to (or reasonably
knowable by) the insured that was relevant to the insurer's decision
would impose an extraordinarily high burden on an insured, which few
could ever fully discharge. Permanent Trustee Aust Ltd & Anor v FAI
General Insurance Co Ltd (in liq) (2003) 12 ANZ Ins Cas 61-565 at page
76, 650.
[9] Keall DCJ (Western Australian District Court) in Delphin v Lumley
General Insurance Ltd (1989) 5 ANZ Ins Cas 60-941 concluded that the
relevant tests required both extrinsic and intrinsic factors to be taken
into account. On the other hand, Brooking J (Victorian Supreme Court) in
Twenty-first Maylux Pty Ltd v Mercantile Mutual Insurance (Aust)
Ltd(1990) VR 919 took the view that 'intrinsic' factors (such as
imperfect understand of English or unfamiliarity with business or
insurance practice) are not to be taken into account. Jones J
(Queensland Supreme Court) applied the test applied by Brooking J in
Twenty-first Maylux Pty Ltd and took into account extrinsic factors
rather than individual idiosyncrasies: Dew v. Suncorp Life and
Superannuation Ltd [2001] QSC 252.
[10] There were no disputes in the 2005-2006 reporting period relating to
the IOS category 'Non-disclosure on proposal' for the general insurance
lines of Caravan/Campervan; Consumer Credit, Marine-Pleasure Craft, Motor
Vehicle - Third Party [TPPD], Small Business and Strata Title. The three
disputes in the reporting period involving disclosure issues relating to
Travel insurance did not involve renewals (undoubtedly due to the nature
of the insurance). However, for the remaining lines of Motor Vehicle,
Home Buildings, Home Contents, Personal Accident/Sickness and Medical
Indemnity, more than half of the disputes involving disclosure issues
were renewals. Three out of four Home Buildings disputes relating to
alleged non-disclosure involved renewals; two out of three Home Contents
disputes relating to alleged non-disclosure involved renewals; three out
of four Personal Accident/Sickness disputes relating to alleged non-
disclosure involved renewals and of four Medical Indemnity disputes, one
related to renewal issues.
Most disclosure/renewal issues arose in relation to Motor Vehicle
insurance disputes. The IOS reported that in the financial year 2005-
2006, motor vehicle disputes made up 35% of all referrals to IOS - 654
out of 1870 disputes in total (in all, 13% of the total of 11,235, 690
motor vehicle policies and renewals issued during 2005-2006 led to
claims). Out of 93 Motor Vehicle disputes involving disclosure issues,
44 complaints resulted where claims had been rejected on renewal for
alleged breaches of disclosure (including alleged misrepresentations).
[11] An insurance company submitted in relation to the 2007 exposure draft
Bill that a renewal under the proposed changes would result in an average
increased cost per policy of $15, a cost that would ultimately be passed
onto customers.
[12] Many, if not most, insureds believe that their duty of disclosure
ends when a proposal application has been completed and accepted by the
insurer (that is,. the proposal - not the contract). See the Annual
Report of the General Insurance Enquiries and Complaints Scheme [IEC]
Annual Report 1996, page 10-11; IEC Annual Report 1997, page 9; IEC
Annual Report, 1998, page 10, cited in Disclosure and concealment in
consumer insurance contracts by Dr Julie-Anne Tarr, Cavendish Publishing
Limted, 2002. [The former General Insurance Enquiries and Complaints
Scheme [IEC] is now part of the Financial Ombudsman Service].
[13] The FICS Panel, for example, dealt with approximately 200 cases
over a ten year period involving alleged non-disclosure by insureds. Two
out of some 14 disputes specifically involving Insurance Contracts Act
section 22 over a period of six years involved extended delays
(approximately four months between application and acceptance and issue
of the contract of insurance) have been reported. At least two
determinations of the Superannuation Complaints Tribunal (involving
delays of two and three month delays respectively) were reported in a
period of just over one year. In the 21 years since the Insurance
Contracts Act became law, a number of cases have arisen before the courts
involving disclosure issues in the context of extended delays: Goodwin v
State Government Insurance Office (QLD) (1991) 6 ANZ Ins Cas 61-064 [Full
Court of the Supreme Court of Queensland]; Summerton v SGIC Life Ltd
(1999) 19 ANZ Ins Cas 90-102; McCabe v Royal & Sun Alliance (2003) WASCA
162.
[14] The insurer argued that the proposed reminder notice requirement
was unnecessary because the duty of disclosure notice has already clearly
informed the insured that the duty continues to apply until the contract
is entered into. It would also require an upgrade to the insurer's
computer systems and increase the administrative burden on the insurer,
again at increased cost. Further the proposed amendment may have an
adverse impact on insureds, because insurers may deal with this issue by
refusing to issue policies more than 2 months in advance. The insured
may instead be asked to call back and obtain a quote closer to the time
of inception of the policy and if they forget to do so, it may result in
non-insurance.
[15] The courts (Hoare v Mercantile Mutual Life Insurance Co unreported,
Rolfe J, Supreme Court of New South Wales,7 November 2000; Herbohn v NZI
Life Limited (1998) 10 ANZ Ins Cas 61-410) and the external resolution
bodies (FICS and the Banking and Financial Services Ombudsman Limited -
now merged into the FOS) have acknowledged there are limitations placed
on insurers by the inflexibility of section 29.
[16] Life insurers often offer 'package' policies that have a number of
different component covers - such as death, TPD, trauma and IP cover.
The client does not have to buy the whole package; rather, they can
select the different options they want. The combination they choose may
or may not include death cover.
[17] The discovery of non-disclosure or misrepresentation may impact the
sum insured or premium levied on certain products, but not others.
Similarly, with knowledge of the additional facts, an insurer may want to
avoid certain aspects of the policy, but not others (for example, avoid
an IP policy but keep the term cover on foot). If bundled contracts
cannot be severed, an insurer may be forced to cancel all cover from
inception, to the detriment of both the insured and the insurer.
[18] In many cases, this allows the insurer to reduce the claim to nil.
[19] Life insurance representatives indicated in a submission to the Review
Panel pointed out that in so far as a distinction exists between the
remedies available for the life insurer in section 29 and the general
insurer under section 28, historically, traditional life insurance
policies (whole of life and endowment policies) offered a bundled mix of
'risk' insurance and participating or non-participating
investment/savings. However, public policy may be been seen to be served
by limiting the insurer's right to void a long term life insurance
bundled policy for innocent misrepresentation to 3 years. It may have
been determined that it would be inequitable for an insurer to have the
right to void a long term bundled investment/risk policy for innocent
misrepresentation. On the other hand, the submission suggested that the
3 year period is consistent with the period referred to in the 'non-
forfeiture' provisions of both the Life Insurance Act 1945 (sections 95
to 102) and the Life Insurance Act 1995 (section 210), restricting the
right of the life insure to avoid a policy for non-payment of contract
premiums after 3 years premiums had been paid. According to the
submission, these non-forfeiture provisions did not apply to term life
insurance where the policy did not provide for a 'surrender value', but
represented pure risk.
[20] In a submission to the Review Panel, life insurance
representatives indicated that whereas in 1972 whole of life and
endowment insurance represented 95.3% of sales that year, by 1996, whole
of life and endowment products represented 6.1% of sales, while
investment account and investment-linked products represented 12.6% of
sales - these types of policies typically have surrender values. On the
other hand, term life insurance provided for an insurance benefit payable
only on death without the investment/savings component. In 1977, the
proportion of new business constituted by Term Insurance was less than
15%. By 2004, the proportion of new long term life insurance represented
by Term Insurance (including Rider Benefits and Disability Insurance,
Crisis, etc) is 94%.
[21] One industry submission to the Review Panel provided an example of the
overall impact on the cost of insurance arising from the inflexibility of
the remedies available to life insurers under section 29. With income
protection insurance, a frequently occurring event is the overstatement
of income, resulting in an insured benefit exceeding the level of
appropriate cover. In the event that no remedy can be applied (that is,.
reduction in insured benefit) when a claim is made, an insured will often
receive more income by remaining on claim than if they returned to work.
The overall effect is extended claim periods and increased claim costs,
which are ultimately passed on to other policyholders in the form of
premium increases. As to the availability of insurance, another industry
submission pointed out that in some cases, section 29 works to penalise
insureds by forcing insurers to allege fraud in order to avoid a contract
where they may in fact have been prepared to offer alternative terms, if
such a remedy were available. The stigma of a fraud allegation made
against an insured by an insurer will result in the insured having
difficulties in obtaining cover in the future. For insurers,
establishing fraud is costly and complex, leading to protracted
litigation with legal costs for individual cases often exceeding
$100,000. Ultimately, these legal costs place pressure on premium rates.